What Is a Broken Wing Butterfly?
A broken wing butterfly (BWB) is a modified butterfly spread where the two wings have unequal widths. In a standard butterfly, both wings are equidistant from the body (middle) strike. In a BWB, one wing is wider than the other, creating an asymmetric payoff profile. This modification allows the spread to be entered for a credit (instead of the typical debit for standard butterflies) while introducing directional bias and asymmetric risk.
The broken wing butterfly is popular among advanced options traders because it can be structured to have no risk on one side of the trade. For a put BWB, skipping a strike on the lower wing means there is no risk to the upside if entered for a credit, while the maximum profit occurs at the middle (body) strike. This makes it an attractive strategy for traders with a moderately bullish or neutral outlook who want defined-risk exposure.
A put broken wing butterfly: Buy 1 lower put (wide wing), Sell 2 middle puts (body), Buy 1 upper put (narrow wing). The wider lower wing creates the 'break' and shifts risk to one side. When entered for a credit, the trade has no risk on the upside and maximum profit at the body strike.
Broken Wing Butterfly Formulas
- 1Narrow wing width = $110 - $100 = $10 (upper wing)
- 2Wide wing width = $100 - $95 = $5 (lower wing)
- 3Max profit = ($5 + $0.50) x 100 = $550 (at $100 at expiration)
- 4Max loss upside = $0 (entered for a credit)
- 5Max loss downside = ($10 - $5 - $0.50) x 100 = $450 (below $95)
- 6Lower breakeven = $95 - ($550/100) = $89.50
- 7Upper breakeven: no risk above $100 (credit entry)
- 8Profit zone: $89.50 to $110, max at $100
BWB Payoff Scenarios
| Stock Price | Lower Wing | Body (2x Short) | Upper Wing | Total P&L |
|---|---|---|---|---|
| $85 | +$1,000 | -$3,000 | +$2,500 | +$550 (credit) |
| $89.50 | +$550 | -$2,100 | +$2,050 | $0 (breakeven) |
| $95 | $0 | -$1,000 | +$1,500 | +$550 |
| $100 | $0 | $0 | +$1,000 | +$550 (max) |
| $105 | $0 | $0 | +$500 | +$550 |
| $110+ | $0 | $0 | $0 | +$50 (credit only) |
Trading the Broken Wing Butterfly
BWB Implementation Guide
- BWBs are ideal in moderate IV environments where standard butterflies are too cheap
- The credit entry feature makes BWBs self-financing: you get paid to take a directional view
- Risk is concentrated on one side only, making the strategy easier to manage than iron condors
- BWBs are sensitive to time decay near the body strike, making them excellent Theta trades
- Pin risk at expiration can cause complex assignment scenarios; close before expiration day
While the BWB eliminates risk on one side, the risk on the broken side can be substantial. A $10-wide broken wing with a $5 narrow wing has real loss potential if the stock moves sharply through the wide side. Always know your maximum loss and position size accordingly.
Many traders use put BWBs as a bullish directional trade that pays them a credit. If the stock rises, you keep the credit with no risk. If it settles at the body strike, you earn maximum profit. The only risk is a sharp downward move through the wide wing, which can be managed with a stop-loss or roll.
Understanding Risk Management in Options Trading
Effective risk management is the foundation of long-term options trading success. Unlike stock investing where your maximum loss is your initial investment, options strategies can have complex risk profiles that require careful monitoring. Defined-risk strategies (spreads, iron condors, covered calls) have a known maximum loss before entering the trade, making position sizing straightforward. Undefined-risk strategies (short naked options) require understanding margin requirements and the potential for losses exceeding initial premium collected. All options traders should use the probability of profit (POP) metric — available on most options platforms — to understand the statistical edge before entering any trade.
Managing winning trades is as important as cutting losers. Research from tastytrade and other quantitative options firms shows that closing profitable short options positions at 50% of maximum profit significantly improves risk-adjusted returns compared to holding to expiration. The intuition: after capturing 50% of the premium, the remaining time risk (gamma risk near expiration) exceeds the potential reward. By closing early, you free up capital for new trades and eliminate the tail risk of a sudden reversal wiping out unrealized profits. This 'take profits at 50%' rule is one of the most robust findings in systematic options trading research.
