Skip-Strike Butterfly
A Skip-Strike Butterfly is an options strategy in which one of the butterfly's strikes is intentionally omitted, creating unequal wing widths, an asymmetric payoff profile, and often a net credit entry — making it synonymous with the Broken Wing Butterfly.
The name skip-strike butterfly comes from the act of skipping a strike when constructing a butterfly spread. In a standard butterfly, if you were to use the 95, 100, and 105 strikes, a skip-strike version might use 95, 100, and 107 — skipping the 106 level — to widen one wing. This skip fundamentally changes the risk profile of the position.
When the upper wing is widened by skipping strikes, the position gains a credit at entry (or reduces its debit) but accepts a larger maximum loss to the upside. This trade-off is acceptable to traders who believe the stock will stay below the short strikes or remain in a tight range. The credit entry means the position breaks even more easily because some premium is already in hand.
Skip-strike butterflies are frequently used around earnings announcements or other binary events where a trader expects the stock to remain within a range but wants to avoid paying a debit in case the stock does nothing. By structuring the butterfly so a net credit is received, the worst case scenario of the stock sitting flat still yields a profit.
The directional bias of a skip-strike butterfly is determined by which wing is skipped. Skipping strikes on the upper wing creates a position that profits from the stock staying flat or declining slightly, with the risk concentrated to the upside. Skipping strikes on the lower wing creates the opposite bias.
Implied volatility skew plays a significant role in the pricing of these structures. When skew is steep, put options are priced at a premium relative to calls, making it easier to collect a credit on a put skip-strike butterfly. Traders aware of skew dynamics can exploit these pricing inefficiencies.
Practical management involves defining maximum acceptable loss before trade entry and committing to exit rules. Because gamma exposure intensifies near expiration and near the short strikes, having a plan to exit or adjust prevents small losses from becoming large ones in the final days of the options cycle.