The Skip Strike Butterfly is a directional options strategy that modifies the traditional butterfly by skipping one or more strikes between the body and one of the wings. This creates an asymmetric payoff profile that can be entered for a credit while targeting a specific price level. Whether you are bullish or bearish, the skip strike butterfly gives you a way to profit from directional moves with limited risk. This guide explains everything you need to know.
What is a Skip Strike Butterfly?
A Skip Strike Butterfly is essentially a butterfly spread where the distance between the short strikes (body) and one of the long strikes (wing) is intentionally made wider by "skipping" one or more strikes. This asymmetry allows the trade to be entered for a credit while maintaining directional profit potential.
The core idea: By making one wing wider than the other, you shift the risk/reward profile. You eliminate risk on the wider wing side and concentrate risk on the narrower side. This gives you a directional bias with defined maximum loss.
Skip Strike Butterfly Structure
The strategy has three legs, similar to a regular butterfly, but with unequal wing widths:
Bullish Skip Strike (Using Puts)
- Buy 1 higher strike put (nearest to current price)
- Sell 2 lower strike puts (at your target price)
- Buy 1 even lower strike put (skip a strike - further away)
Bearish Skip Strike (Using Calls)
- Buy 1 lower strike call (nearest to current price)
- Sell 2 higher strike calls (at your target price)
- Buy 1 even higher strike call (skip a strike - further away)
Bullish Put Skip Strike Example
Stock ABC is trading at $100. You are bullish and expect the stock to stay above $90 or rally.
- Buy 1x $95 put: $2.00
- Sell 2x $90 puts: $1.00 each = $2.00
- Buy 1x $80 put: $0.25 (skipped $85 strike)
Net debit: $2.00 - $2.00 + $0.25 = $0.25 debit
The upper wing is $5 wide ($95 to $90), while the lower wing is $10 wide ($90 to $80).
Skip Strike for Credit
Adjusting strikes to collect a credit:
- Buy 1x $97 put: $2.50
- Sell 2x $92 puts: $1.50 each = $3.00
- Buy 1x $82 put: $0.40 (skipped $87 strike)
Net credit: $3.00 - $2.50 - $0.40 = $0.10 credit
Now if the stock stays above $97, you keep the $10 credit with no risk.
Profit and Loss Breakdown
Maximum Profit
Maximum profit occurs when the stock closes exactly at your short strikes at expiration:
- Using our credit example with $92 short strikes
- Stock at $92: The $97 put is worth $5.00
- The $92 and $82 puts expire worthless
- Total profit: $5.00 + $0.10 credit = $5.10 ($510 per contract)
Upper Side (No Risk Zone)
If stock stays above $97:
- All puts expire worthless
- You keep the $0.10 credit ($10)
- No loss possible when entered for credit
Lower Side (Risk Zone)
If stock drops below $82:
- Upper spread profit: $5.00 ($97 to $92)
- Lower spread loss: $10.00 ($92 to $82)
- Net loss: $10.00 - $5.00 - $0.10 = $4.90 ($490 maximum loss)
Comparing Skip Strike to Standard Butterfly
| Feature | Standard Butterfly | Skip Strike Butterfly |
|---|---|---|
| Wing Widths | Equal (symmetric) | Unequal (asymmetric) |
| Entry Cost | Usually debit | Often credit or small debit |
| Risk Profile | Risk both sides | No risk on one side |
| Directional Bias | Neutral | Directional |
| Max Profit Location | At short strike | At short strike |
When to Use the Skip Strike Butterfly
This strategy excels in specific market conditions:
- Directional conviction: You have a view on which way the stock will NOT go
- Target price: You have a specific level in mind for where the stock will settle
- High implied volatility: Elevated IV makes credit entries easier
- Support/resistance plays: Stock is near a strong technical level
- Low cost speculation: Want directional exposure with minimal capital
Strike Selection Strategy
Choosing the Short Strikes
The short strikes should be placed at your target price - where you expect the stock to settle at expiration:
- Look at support/resistance levels
- Consider moving average targets
- Factor in expected percentage moves
Choosing the Close Wing
The close wing (narrow side) should be near the current stock price:
- Usually 1-2 strikes away from the short strikes
- Close enough to generate premium when sold
Choosing the Skip Strike
The far wing determines your risk-free zone:
- Skip at least 1 strike (wider = more credit but less max profit)
- Consider skipping 2 strikes for larger credits
- Balance credit received against maximum profit potential
Strike Selection Example
Stock at $100, you are bullish, target is $95:
- Short strikes: $95 (your target)
- Close wing: $100 (near current price)
- Far wing: $85 (skip $90 for credit entry)
Result: No risk above $100, max profit at $95, risk below $85.
Managing the Position
Taking Profits
Because the max profit zone is narrow, consider taking profits at 30-50% of maximum:
- Reduces risk of the stock moving away from your target
- Locks in profits while they exist
- Frees capital for new opportunities
When the Stock Moves Toward the Risk Side
- Close early: Accept a small loss before it grows
- Roll the position: Move the entire structure to follow the stock
- Add protection: Buy an additional option to cap losses
When the Stock Moves to the No-Risk Side
- Let the position expire worthless
- Keep your credit with no further action
- Close early for pennies to eliminate any residual risk
Bearish Skip Strike Example
Bearish Call Skip Strike Setup
Stock XYZ at $100. You are bearish, expecting the stock to fall to $105 resistance or lower.
- Buy 1x $100 call: $3.00
- Sell 2x $105 calls: $1.75 each = $3.50
- Buy 1x $115 call: $0.40 (skipped $110 strike)
Net credit: $3.50 - $3.00 - $0.40 = $0.10 credit
No risk if stock drops (keep $10), max profit at $105, risk only above $115.
Common Mistakes to Avoid
- Skipping too many strikes: Reduces maximum profit significantly
- Wrong directional bias: Ensure your skip is on the direction you do not expect
- Illiquid options: Wide bid-ask spreads kill profitability
- Poor target selection: Random short strike placement leads to losses
- Holding through expiration: Pin risk can create unexpected losses
Tips for Success
- Always try for credit: No risk on the skip side when entered for credit
- Use technical analysis: Place short strikes at meaningful levels
- Trade liquid underlyings: SPY, QQQ, and major stocks work best
- 30-45 DTE: This timeframe balances premium and time to be right
- Size conservatively: The risk side can produce real losses
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Summary
The Skip Strike Butterfly is a powerful directional strategy that modifies the traditional butterfly for asymmetric risk/reward. By skipping strikes on one wing, you can enter for a credit, eliminate risk on one side, and target specific price levels with substantial profit potential. The key is selecting short strikes at realistic target prices and managing the position before expiration. When used correctly, the skip strike butterfly provides directional exposure with limited capital and defined risk.
Want to explore more butterfly variations? Check out our broken wing butterfly guide or learn about Christmas tree spreads.