Broken Wing Butterfly: The Asymmetric Bet

A broken wing butterfly is a butterfly spread with one wing wider than the other. The asymmetry shifts the risk profile. Done right, the trade opens for a credit and one entire side carries no risk. The downside is concentrated on the wider wing side, where the loss can be sharp if price runs through it.

This is a directional defined risk trade dressed up as a butterfly. The directional bias is built into the skew.

The Standard Butterfly Refresher

A standard call butterfly: buy 1 call at strike A, sell 2 calls at strike B, buy 1 call at strike C. Strike B is centered between A and C. All wings are equal width. The trade always opens for a debit. Max profit is at strike B at expiration. Max loss is the debit paid.

How A Broken Wing Differs

Same general structure but the wings are not equal. Example bullish broken wing on a $100 stock:

• Buy 1 call at $100 (lower wing)
• Sell 2 calls at $105 (body)
• Buy 1 call at $115 (upper wing, wider)

The upper wing is $10 wide. The lower wing is only $5 wide. That asymmetry can let the trade open for a credit instead of a debit, depending on the strikes and the volatility.

Why It Opens For Credit

The wider upper wing buys cheaper options (further OTM) than the narrower lower wing pays. When you net the long calls and the short call body, the math flips to credit if the wings are skewed enough.

When it does open for a credit, that credit is what you keep if the stock finishes below the lower strike. The trade pays you to put it on.

The Risk Profile

• Stock below $100 at expiration: all options expire worthless. You keep the credit. No risk to the downside.
• Stock at $105 at expiration: max profit. The two short calls expire worthless at the money, the long $100 call is worth $5, the long $115 call expires worthless. Max profit is that $5 plus the credit (or minus the debit), times 100.
• Stock between $105 and $115 at expiration: the trade gives back ground as price climbs. Stock at $115 or higher: the loss hits its max and stays flat no matter how far price runs.
• Max loss occurs at or above the upper wing strike: the $10 wide wing minus the $5 narrow wing, minus the credit collected, times 100.

Bullish vs Bearish Skew

Bullish broken wing: built with calls, wide wing above the body. Profits most if the stock sits at the body at expiration. Loses if stock blows past the wide wing to the upside.

Bearish broken wing: built with puts, wide wing below the body. Profits most if the stock sits at the body at expiration. Loses if stock crashes through the wide wing.

When To Use It

Slightly directional bias but not certain. Elevated IV makes the credit fatter. 30 to 45 days to expiration for balanced theta and gamma.

Best on liquid underlyings where the multi leg execution does not slip too much. Spy, QQQ, large cap tech names with active options markets.

Management

Take profit at 50% of max profit when possible. If the trade opened for credit and the credit is mostly preserved, close early.

If the price moves toward the body strike, the trade is winning. Hold or take partial profit.

If the price moves toward the wide wing, the trade is losing. Decide: close to limit damage, or roll if the chart has changed.

What Kills It

• Sharp move through the wide wing. Loss can be material relative to credit collected.
• Volatility crush right after entry. Premium collapses before theta decay accumulates.
• Wrong direction. A bullish broken wing opened for a debit loses that debit if the stock falls below the lower strike.

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