September 16, 2021

Broken Wing Butterfly Options Play

Broken Wing Butterfly Options Play

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The broken wing butterfly is an option play that is also called a skip strike butterfly and can be constructed with calls or puts. It is an adjustment to a conventional butterfly option play.

This strategy using call options consists of embedding a short call option spread inside of a long call butterfly spread. An option trader is selling a short call spread to lower the cost basis for the butterfly play. Since creating those call option spreads individually would require both buying and selling a call at strike C in the example below, they nullify each other resulting in a dead strike inside the conventional butterfly play structure.

Broken wing butterfly option play structure:

  • Open this play when the stock is near strike A.
  • Strike price A: Long call option. 
  • Strike price B: Sell two call options short.
  • Strike price C: Skip over. 
  • Strike price D: Long call option. 
  •  Strike prices are for the same month expiration and are equidistant.

Broken Wing Butterfly Options Play

This option play is used by a mildly bullish trader. An option trader would want the underlying stock to move to strike B and stop around that area.

If a broken wing butterfly is opened for a net credit the the break-even price level is located at strike C with the net credit received when establishing the strategy.

If a broken wing butterfly is opened for a net debit there are two possible break-even price levels:

  • Strike A with the net debit cost.
  • Strike C minus the net debit cost.

Maximum profit is capped to strike B minus strike A minus the net debit paid, or plus the net credit received.

Risk is capped to the difference between strike C and strike D minus the net credit received or plus the net debit paid.

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Broken Wing Butterfly Options Play