Broken Wing Butterfly Options Strategy

The broken wing butterfly is one of the best options strategies I have ever learned about. If you do it right there is very little risk and a nice profit waiting for you.

The Butterfly vs. the Broken Wing Butterfly

Take a moment to think about this. If the spread is OTM the week of expiration (or expiration day) both spreads may expire worthless. The BWB was put on for a small credit so you will be profitable by a smidgen, whereas the traditional butterfly was put on for a debit and will result in a loss.

If the stock is at the first buy strike with a week to go until expiration the butterfly is up (in this example using today’’s prices and current volatility measurements) perhaps $0.05. The BWB, however, would be up $0.55.

If the stock is at the center strike the butterfly is still only up a smidgen because of the probability that the stock will close at the “sweet spot” and the furthest OTM is decaying. The BWB, however, is now trading for roughly half of its maximum value and perhaps half of the position can be taken off and the other half be played with.

If the stock is at the bottom strike roughly the same profit and loss will occur has the stock been at the top strike (using puts). Yes, if you allow the stock/index to fall through the bottom strike with puts (or go above the top strike with calls) you run the possibility of a loss if you do not adjust the position. The good news for those wanting to trade the BWB, though, is that everyday you can look at the position and determine where the area of maximum profitability is, and where you would theoretically start to lose money. With that knowledge before the fact you can trade the position accordingly.

I have to state a few things for clarity and your protection. The trade above was used for example purposes only and is not the best BWB I saw by any means. I used this as a good example, not as a good trade. Please do not trade off of this. This is not a recommendation to invest in any security or derivative. Also, though it is my opinion and favorite strategy to trade, it may not be the best strategy for you. I love this trade dearly, but if you do not understand it thoroughly I would strongly suggest staying away from it until you do learn how to trade it. Many market-maker friends I had on the floors made fortunes with minimal actual risk (compared to theoretical risk) trading these type of trades, but some novices lost fortunes mimicking them not knowing what they were doing themselves. If you like them, get to know them well and they should serve you well. If you don’t understand the difference between theoretical option movement and real option movement or the strategy, then I suggest you get some more education no matter what strategy you trade.    –more

Here is a video explaining the Broken Wing Butterfly Options Trading Strategy.