Broken Wing Butterfly
A Broken Wing Butterfly is a modified butterfly spread in which the wings are unequal in width, creating an asymmetric risk-reward profile and often allowing the position to be entered for a net credit rather than a debit.
A standard butterfly spread involves three strike prices equally spaced: a lower wing, a body, and an upper wing. The Broken Wing Butterfly (BWB) deliberately uses unequal spacing — one wing is wider than the other — shifting risk to one side of the trade in exchange for collecting a credit or reducing the debit required.
In a call broken wing butterfly, the trader might buy a call at the 100 strike, sell two calls at the 105 strike, and buy a call at the 112 strike rather than 110. The extra two points on the upper wing widen the potential max loss on the upside, but that asymmetry allows the position to be opened for a net credit. The practical implication is that if the stock drifts lower and all options expire worthless, the trader keeps the credit and makes money on a directional miss.
For a put broken wing butterfly constructed for a bullish bias, the lower wing is widened. The result is a position that profits if the stock stays above the lower short strike at expiration, collects premium if the stock remains flat, and loses on a severe downside move through the skipped strike.
The term skip-strike butterfly is often used interchangeably with broken wing butterfly because a strike is literally skipped to create the unequal width. Traders specifically choose the direction of the skip based on their directional bias and the current implied volatility skew in the market.
One important nuance is that broken wing butterflies have a zone of maximum profit at the short strikes at expiration, just like a standard butterfly. The difference is that the position can be entered for zero cost or a credit, meaning any outcome other than a dramatic move through the wide wing is profitable to some degree.
Risk management involves monitoring gamma exposure as expiration approaches. The position can rapidly swing in value in the final days before expiration if the underlying is near the body of the butterfly. Many traders close at 50 percent of maximum profit or convert the position before the final week of expiration to avoid pin risk.