The Broken Wing Butterfly, often called BWB, is a modified butterfly spread that removes risk on one side of the trade while maintaining significant profit potential. Unlike a traditional butterfly where both wings are equidistant from the body, the broken wing version has unequal wings - one is wider than the other. This creates a directional bias and can often be entered for a credit. This guide will teach you how to master this versatile strategy.
What is a Broken Wing Butterfly?
A Broken Wing Butterfly is a three-legged options strategy similar to a standard butterfly spread, but with one wing intentionally made wider than the other. This asymmetry serves two purposes: it gives the trade a directional bias and often allows you to collect a credit when entering the position.
The key concept: By skipping a strike on one wing, you create a spread that has no risk in one direction (the broken wing side) while maintaining substantial profit potential if the stock moves to your target price. You trade away symmetry for directional edge.
Types of Broken Wing Butterflies
Put Broken Wing Butterfly (Bullish)
This is used when you are bullish and want no risk to the downside.
- Buy 1 higher strike put
- Sell 2 middle strike puts
- Buy 1 lower strike put (skip a strike - make it wider)
Call Broken Wing Butterfly (Bearish)
This is used when you are bearish and want no risk to the upside.
- Buy 1 lower strike call
- Sell 2 middle strike calls
- Buy 1 higher strike call (skip a strike - make it wider)
Put BWB Example (Bullish Bias)
Stock XYZ is trading at $100. You are bullish and want to target $95 with no downside risk.
- Buy 1x $100 put: $3.50
- Sell 2x $95 puts: $1.75 each = $3.50
- Buy 1x $85 put: $0.50 (skipped $90 strike)
Net cost: $3.50 - $3.50 + $0.50 = $0.50 debit
The wing from $95 to $85 is $10 wide, while the wing from $100 to $95 is only $5 wide. This is the "broken" part.
Put BWB for a Credit (Better Setup)
Let us adjust to collect a credit:
- Buy 1x $100 put: $3.50
- Sell 2x $97 puts: $2.25 each = $4.50
- Buy 1x $89 put: $0.75 (skipped $93 strike)
Net credit: $4.50 - $3.50 - $0.75 = $0.25 credit
Now you have no risk if the stock rallies (you keep the $25 credit) and maximum profit if the stock settles at $97 at expiration.
Anatomy of the Profit/Loss
Maximum Profit
Maximum profit occurs when the stock closes exactly at your short strikes at expiration. Using our credit example:
- Stock at $97 at expiration
- $100 put worth $3.00
- $97 puts expire worthless
- $89 put expires worthless
- Profit: $3.00 + $0.25 credit = $3.25 ($325 per contract)
Upside Risk (The "Good" Side)
If the stock stays above $100:
- All puts expire worthless
- You keep your $0.25 credit ($25)
- No loss possible - this is the broken wing advantage
Downside Risk (The "Broken" Side)
If the stock drops below $89:
- Upper wing profit: $3.00 ($100 to $97)
- Lower wing loss: $8.00 ($97 to $89)
- Net loss: $8.00 - $3.00 - $0.25 = $4.75 ($475 maximum loss)
Why Use a Broken Wing Butterfly?
- No risk on one side: The wider wing eliminates risk in one direction
- Often free or credit: The asymmetry often generates net credit
- Defined risk: Maximum loss is known and limited
- High reward potential: Can return 5:1 or better at maximum profit
- Low capital requirement: Needs less margin than naked options
Setting Up the Optimal BWB
Strike Selection Guidelines
- Short strikes: Place these at your target price where you expect the stock to settle
- Long wing (close side): Usually 1 strike width away (3-5 points)
- Broken wing (far side): Skip 1-2 strikes to create the asymmetry
Time to Expiration
BWBs work best with 30-60 days until expiration. This provides:
- Enough time for the stock to move to your target
- Reasonable theta decay as expiration approaches
- Flexibility to adjust if needed
Managing the Position
When the Trade is Working (Stock Moving to Target)
- Let the trade work as theta decays the short options
- Consider taking profits at 50% of maximum profit
- Do not get greedy waiting for the stock to land exactly on your short strike
When the Stock Moves Away (Toward the Broken Wing)
If the stock moves toward your broken wing:
- Roll the position: Move the entire structure down/up to follow the stock
- Close for a loss: Accept a small loss before it becomes large
- Convert to iron butterfly: Buy a protective option to cap losses
Rolling Example
Stock drops to $93 and your BWB is approaching the danger zone:
- Close the $100/$97/$89 BWB for a loss
- Open a new $95/$92/$84 BWB
- Collect additional credit on the new position
Rolling gives you a new position centered on the current price.
When the Stock Moves the "Free" Direction
If the stock rallies (in our bullish put BWB example):
- All options decay toward worthless
- You collect your credit and have no further action needed
- Let it expire or close for a small amount to remove assignment risk
Call BWB Example (Bearish)
Bearish Call BWB Setup
Stock ABC at $100. You are bearish, targeting $105.
- Buy 1x $100 call: $3.50
- Sell 2x $103 calls: $2.00 each = $4.00
- Buy 1x $111 call: $0.25 (skipped $106 strike)
Net credit: $4.00 - $3.50 - $0.25 = $0.25 credit
No risk if stock drops (keep $25), maximum profit at $103, risk only above $111.
Common Mistakes to Avoid
- Paying too much: Always try to enter for a credit or minimal debit
- Wrong directional bias: Make sure the broken wing is on the direction you fear
- Too wide broken wing: Extremely wide wings reduce max profit potential
- Ignoring liquidity: Only trade liquid options with tight spreads
- Holding too long: Take profits - the max profit zone is narrow
BWB vs Standard Butterfly
| Feature | Standard Butterfly | Broken Wing Butterfly |
|---|---|---|
| Wing Width | Equal | Unequal |
| Entry Cost | Usually debit | Often credit |
| Risk Profile | Symmetric both sides | No risk on one side |
| Directional Bias | Neutral | Directional |
Tips for Success
- Target realistic moves: Place short strikes where the stock could realistically settle
- Use in high IV: Elevated volatility increases credit potential
- Monitor the Greeks: Watch delta as the stock approaches your short strikes
- Size appropriately: The broken wing can produce losses - size accordingly
- Have an exit plan: Know when you will take profits or cut losses
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Summary
The Broken Wing Butterfly is a powerful directional strategy that combines the profit potential of a butterfly spread with the safety of no risk on one side. By skipping a strike on one wing, you create an asymmetric position that can be entered for a credit while still offering significant profit potential. The trade-off is that you have risk on the broken wing side, making position management important. When used correctly, the BWB is an excellent tool for targeting specific price moves with defined risk and high reward potential.
Want to learn more butterfly variations? Check out our skip strike butterfly guide or explore Christmas tree spreads.