A skip strike butterfly (also called a broken wing butterfly) is a modified butterfly spread where the wings are not equidistant from the center strike. By "skipping" a strike on one side, you create a position that can be entered for a credit while maintaining defined risk. This strategy combines directional bias with the structure of a butterfly.
What is a Skip Strike Butterfly?
A standard butterfly has equal-width wings. A skip strike butterfly has unequal wings - one side is wider than the other. This asymmetry allows you to receive a credit at entry while having no risk on one side of the trade.
Simple version: A regular butterfly has balanced wings. A skip strike butterfly has one wing stretched out further. This stretching lets you get paid to enter the trade, but you have more risk on the stretched side if the stock moves against you.
Skip Strike Put Butterfly (Bullish)
The most common skip strike butterfly uses puts and profits when the stock stays above a certain level or rises.
- Buy 1 higher strike put (at the money)
- Sell 2 lower strike puts (below the money)
- Buy 1 even lower strike put (skip one or more strikes)
Skip Strike Put Butterfly Example
Stock XYZ is trading at $100. You are bullish or neutral.
Standard put butterfly would be: Buy $100 put, sell 2 $95 puts, buy $90 put
Skip strike put butterfly:
- Buy 1 $100 put for $4.00
- Sell 2 $95 puts for $2.00 each ($4.00 credit)
- Buy 1 $85 put for $0.50 (skip the $90 strike)
Net credit: $4.00 - $4.00 + $0.50 = $0.50 credit ($50)
Outcomes:
- Stock above $100: All puts expire worthless, keep $50 credit
- Stock at $95: Maximum profit = $5 (width) - $0 + $0.50 credit = $5.50 ($550)
- Stock at $85: Break-even point
- Stock below $85: Maximum loss = $10 (unbalanced width) - $5 (balanced width) - credit = $4.50 ($450)
Skip Strike Call Butterfly (Bearish)
The bearish version uses calls and profits when the stock stays below a level or falls.
- Buy 1 lower strike call (at the money)
- Sell 2 higher strike calls (above the money)
- Buy 1 even higher strike call (skip one or more strikes)
Skip Strike Call Butterfly Example
Stock XYZ is at $100. You are bearish or neutral.
- Buy 1 $100 call for $4.00
- Sell 2 $105 calls for $2.00 each ($4.00 credit)
- Buy 1 $115 call for $0.50
Net credit: $0.50 ($50)
Outcomes:
- Stock below $100: All calls expire worthless, keep $50 credit
- Stock at $105: Maximum profit
- Stock above $115: Maximum loss occurs
Why Trade Skip Strike Butterflies?
1. Credit at Entry
Unlike standard butterflies that require a debit, skip strike butterflies can be entered for a credit. This means you get paid to put on the trade.
2. No Risk on One Side
If the stock moves favorably (up for put version, down for call version), you keep the credit with no loss possibility.
3. Defined Maximum Risk
While there is risk on the "broken" side, it is capped and known at entry.
4. High Probability of Profit
You profit if the stock stays above (put version) or below (call version) your short strike.
5. Directional Bias with Structure
Combines a directional view with the risk management of a butterfly structure.
Calculating Risk and Reward
Maximum Profit
Maximum profit occurs when the stock is exactly at your short strikes at expiration:
Max Profit = Width of narrow side + Net credit (or - Net debit)
Maximum Loss
Maximum loss occurs when the stock moves past your wide wing:
Max Loss = Width of wide side - Width of narrow side - Net credit
Break-Even Point
For put skip strike: Break-even = Short strike - (Short strike - Wide wing strike) + Max profit
Key insight: The "skip" in skip strike butterfly shifts risk from one side to the other. You eliminate risk on one side but take on more risk on the other. This is a tradeoff, not free money.
Skip Strike vs Standard Butterfly
| Factor | Skip Strike Butterfly | Standard Butterfly |
|---|---|---|
| Entry Cost | Credit or small debit | Debit |
| Risk on One Side | Zero (the narrow side) | Debit paid |
| Risk on Other Side | Higher than standard | Same as other side |
| Directional Bias | Yes | Neutral |
| Max Profit Location | At short strike | At short strike |
Skip Strike vs Iron Condor
- Iron condor: Profits across a range, risk on both sides
- Skip strike butterfly: Profits best at one point, risk only on one side
- Probability: Skip strike has higher probability of small profit
- Max profit: Skip strike has higher max profit potential
When to Use Skip Strike Butterflies
- Directional bias: You have a bullish or bearish view
- Want credit entry: You prefer to receive premium
- Support/resistance levels: You identify a price the stock should not breach
- Targeting specific price: You expect the stock to land near a specific level
- Earnings plays: When you expect limited movement in one direction
Managing Skip Strike Butterflies
Stock Moves Favorably
- Let the position run - all options will expire worthless
- Close early to lock in the credit if you want to free up margin
Stock Moves Toward Short Strike
- This is the profit zone - monitor closely
- Consider closing at 50-75% of max profit
Stock Moves Toward Wide Wing
- This is the danger zone
- Set a stop loss at a predetermined level
- Consider rolling the position to a later expiration
- Close the trade to limit losses
Adjusting the Width
You can adjust how many strikes you skip to change the risk/reward profile:
- Skip 1 strike: Smaller credit, less risk on wide side
- Skip 2 strikes: Larger credit, more risk on wide side
- Skip 3+ strikes: Even larger credit, significant risk on wide side
The wider you make the broken wing, the more credit you receive but the more risk you take on.
Tips for Trading Skip Strike Butterflies
- Choose the right direction: The narrow side should face the direction you expect the stock to move
- Select appropriate strikes: Put short strikes below support, call short strikes above resistance
- Size conservatively: The asymmetric risk means you can lose more than you collect
- Monitor closely: These require more attention than standard butterflies
- Have an exit plan: Know when you will take profits or cut losses
- Consider time to expiration: 30-45 days is often optimal
Track Your Butterfly Spreads
Pro Trader Dashboard tracks all your options strategies including skip strike butterflies. Monitor your P/L and risk in real-time.
Summary
A skip strike butterfly is a modified butterfly spread with unequal wings that allows you to enter for a credit while having zero risk on one side. The tradeoff is increased risk on the "broken" wing side. This strategy combines directional bias with defined risk and is useful when you expect a stock to stay above or below a certain level. Remember that while you can receive a credit to enter, your maximum loss can exceed that credit significantly.
Learn about related strategies: butterfly spreads and iron condors.