Broken Wing Butterfly: Short & Long Options (2024)

FAQs

What is the broken wing butterfly options strategy? ›

A broken-wing butterfly (BWB) is very similar to a traditional iron butterfly, with one key difference: the out-of-the-money long options are not equal distance from the short strikes. When purchasing the long options, at least one long strike price is closer to the short strike, thus creating a “broken-wing.”

Things You Should Know

Set the butterfly in a jar with air holes and place it in the fridge for 10 minutes. If less than ⅓ of the wing is damaged, cut the other wing to make them match.

The butterfly spread is typically put on as a debit, meaning the trader pays a net premium to initiate the trade. However, by making a small adjustment to a butterfly spread, it's possible for a trader to potentially turn the debit into a credit through what's called an unbalanced, or broken wing, butterfly.

“The spiritual meaning of a butterfly with a broken wing is one of resilience and hope. It reminds us that even in the face of adversity, we can still find the courage to persevere and emerge stronger than before.”

The risk of the strategy is constrained to the premium required to obtain the position. The difference between the written call's strike price and the bought call's strike price, less the paid premiums, is the maximum profit. That is why the butterfly strategy success rate is good.

Since the volatility in option prices tends to fall sharply after earnings reports, some traders will buy a butterfly spread immediately before the report. The potential profit is “high” in percentage terms and risk is limited to the cost of the position including commissions.

The Broken Wing Butterfly (BWB) is a type of options trading strategy that involves simultaneously buying and selling options at different strike prices to generate profits.

So, what did we learn about the bullish broken wing butterfly option strategy? Your maximum profit will occur if and when the underlying security hits the short strike price. The loss risk is limited to a fraction of your maximum profit, giving you a high reward-to-risk ratio.

If less than 1/3 of the wing is damaged, you can carefully trim the other wing so they both match, which won't hurt the butterfly and will still allow it to fly. For more severe damage, make a splint out of cardstock and contact adhesive.

This strategy is employed when an investor or trader holds a neutral or slightly bullish outlook. Unlike short strangles, which involve selling both an upside call and a downside put, the jade lizard includes buying an additional upside call with a higher strike price than the short call.

What is the double butterfly option strategy? ›

The Double Long Butterfly Spread is an advanced options trading strategy that combines a Long Put Butterfly Spread and a Long Call Butterfly Spread. This strategy is designed to capitalize on a stock or index trading in a narrow range.

OTM Butterfly Spreads

The trade can show a profit provided that the stock doesn't move too far in either direction. An OTM butterfly is built the same way as a neutral butterfly: by buying one call, selling two calls at a higher strike price, and buying one more call option at a higher strike price.

An adult butterfly is fully formed, cannot grow and doesn't really heal. If you find a butterfly with a broken wing, the insect is probably never going to fly again. The butterfly can, however, live. If the butterfly is female and has already mated, she might even lay eggs, which you can raise when they hatch.

In Native American Indian culture as well, butterflies represent change: But many tribes consider the butterfly to be lucky. So, although sometimes thought of as a messenger from the spirit world, the butterfly is primarily a symbol of change.

When to use Broken Wing Butterfly. The Broken Wing Butterfly (BWB) is a strategic option for those seeking to profit from small, consistent gains. This strategy is best utilized in low-volatility markets where the stock is expected to have limited price movements.

Butterfly versus Straddle

For the butterfly, the breakeven points are the lower strike plus the premium paid and the upper strike minus the premium paid. In our example, we bought the butterfly for 1.75. The low strike of the fly is 2395. Adding 1.75 to that strike gives us our first breakeven point of 2396.75.

Unbalanced butterflies include an extra short call or put vertical, even though it might not be readily visible in the chart. They're sold at the strike furthest out of the money² (OTM), and the goal is to sell enough premium in the second vertical to place the trade for a credit.