The broken wing butterfly (BWB) is an advanced options strategy that modifies the traditional butterfly spread by using unequal wing widths. This asymmetry can eliminate risk on one side of the trade while maintaining significant profit potential. Often entered for a credit, the BWB is popular among income traders who want directional bias with defined risk.
What is a Broken Wing Butterfly?
A broken wing butterfly is a butterfly spread where the wings are not equidistant from the body. In a traditional butterfly, both wings are the same distance from the middle strike. In a BWB, one wing is further away (the "broken" wing).
The key benefit: By widening one wing, you collect more credit on that side. If set up correctly, you can eliminate risk on the narrow-wing side completely, leaving risk only under the broken (wider) wing. This creates an asymmetric risk/reward profile.
Types of Broken Wing Butterflies
Put Broken Wing Butterfly (Skip-Strike Put Butterfly)
Most common type. Risk is to the downside, no risk to the upside:
- Buy 1 higher strike put
- Sell 2 middle strike puts
- Buy 1 lower strike put (further away than normal)
Call Broken Wing Butterfly
Risk is to the upside, no risk to the downside:
- Buy 1 lower strike call
- Sell 2 middle strike calls
- Buy 1 higher strike call (further away than normal)
Example: Put Broken Wing Butterfly
Stock XYZ is at $100. You set up a put BWB:
- Buy 1 $100 put for $3.00
- Sell 2 $95 puts for $1.50 each ($3.00 total)
- Buy 1 $85 put for $0.30 (10 points wide vs 5 points)
Net premium: $3.00 collected (2 x $1.50 short puts) - $3.00 (long $100 put) - $0.30 (long $85 put) = -$0.30 (small debit)
Or with better fills, this could be a credit.
Risk profile:
- Above $100: Loss limited to the $0.30 debit (a credit entry would make this a small profit)
- At $95: Maximum profit (short puts expire worthless, long $100 put is worth $5)
- Below $85: Maximum loss of $5.30 (the $5 difference in wing widths plus the $0.30 debit)
How the BWB Eliminates Upside Risk
In a put BWB, here is what happens if the stock rallies:
- All puts expire worthless
- If entered for a credit, you keep the credit as profit
- If entered for a debit, that debit is your maximum upside loss
The "no upside risk" occurs when you can enter the trade for a credit. Any rally means all options expire worthless, and you keep the credit.
Example: No Upside Risk BWB
You enter a put BWB for a $0.50 credit:
- Buy 1 $100 put
- Sell 2 $95 puts
- Buy 1 $85 put
Stock at $110 at expiration: All puts worthless. You keep $0.50 credit.
Stock at $102 at expiration: All puts worthless. You keep $0.50 credit.
No matter how high the stock goes, your profit is at least $0.50.
Profit and Loss Profile
Maximum Profit
Occurs when the stock is at the short strike (middle) at expiration. The profit equals the width of the narrower wing plus the credit received (or minus the debit paid).
No Risk Zone
On the narrow-wing side (in a put BWB, above the highest strike). If entered for a credit, you profit there. If entered for a debit, you have only a small fixed loss.
Maximum Loss
Occurs when the stock moves past the outer strike of the wider (broken) wing. Maximum loss = width of wider wing - width of narrower wing - credit received (or plus the debit paid).
Break-Even
Calculated based on specific strikes and premium received. The main break-even sits on the broken-wing (risk) side, between the short strike and the far long strike.
Think of it this way: You are sacrificing balanced risk for a directional bias. You accept more risk on one side in exchange for little or no risk on the other side.
Setting Up a Winning BWB
Follow these guidelines for optimal BWB construction:
Strike Selection
- Short strikes: Slightly out-of-the-money (where you think the stock will be)
- Narrow wing: Equal distance from short strike on the side you expect movement
- Broken wing: 2-3x the width of the narrow wing on the "safe" side
Credit vs Debit Entry
- Credit entry: Ideal. Guarantees profit on one side.
- Small debit: Acceptable if max profit is significantly larger.
- Large debit: Avoid. Defeats the purpose of the strategy.
Time to Expiration
- 30-60 DTE works well
- Too short: Not enough premium to collect
- Too long: More time for stock to move against you
Example: Well-Constructed Put BWB
Stock at $500. You expect it to stay above $480.
- Buy 1 $500 put (ATM)
- Sell 2 $490 puts (where you expect stock)
- Buy 1 $470 put (20 points below vs 10 points above)
Narrow wing: $500-$490 = $10
Broken wing: $490-$470 = $20
Profile:
- Above $500: No risk (if entered for credit)
- At $490: Max profit of $10 (per contract) + credit
- Below $470: Max loss of $10 - credit
BWB vs Regular Butterfly
Regular Butterfly
- Symmetric wings (equal distance)
- Entered for a debit
- Risk on both sides (debit paid)
- Max profit at middle strike
Broken Wing Butterfly
- Asymmetric wings (unequal distance)
- Often entered for a credit
- Risk only on one side (the broken-wing side)
- Max profit still at middle strike
- Better for directional bias
Managing a Broken Wing Butterfly
Trade Going Well (Stock Near Short Strike)
- Take profit at 50-75% of max
- Let it run if comfortable with gamma risk near expiration
Stock Moving to No-Risk Side
- Let expire for credit if entered that way
- Close early to free up capital
Stock Moving to Risk Side
- Roll the entire position down/up and out
- Close for a loss before max loss is reached
- Convert to iron butterfly by adding opposite side
When to Use Broken Wing Butterflies
BWBs work best when:
- You have a directional bias: Expect the stock to stay on one side
- IV is elevated: Easier to get credit entry
- You want defined risk: Know your maximum loss upfront
- Trading around support/resistance: Place short strikes at key levels
Common BWB Mistakes
- Entering for too large a debit: Defeats the no-risk advantage.
- Poor strike selection: Short strikes too far from current price reduces max profit.
- Ignoring the risk side: BWBs still have significant risk on one side.
- Holding through expiration with risk: Gamma risk spikes near expiration.
- Not considering early assignment: Deep ITM options can be assigned early.
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Summary
The broken wing butterfly is an advanced strategy that creates asymmetric risk by using unequal wing widths. When entered for a credit, it eliminates risk on one side while maintaining significant profit potential if the stock settles near the short strikes. It combines the benefits of a butterfly spread with the directional bias of a credit spread, making it ideal for traders with a market view who want defined risk.
Learn more about related strategies in our guides on butterfly spreads, iron butterflies, and iron condors.