The broken wing butterfly is an option play that is also called a skip strike butterfly and can be constructed with calls or puts. It is an adjustment to a conventional butterfly option play.

This strategy using call options consists of embedding a short call option spread inside of a long call butterfly spread. An option trader is selling a short call spread to lower the cost basis for the butterfly play. Since creating those call option spreads individually would require both buying and selling a call at strike C in the example below, they nullify each other resulting in a dead strike inside the conventional butterfly play structure.

Broken wing butterfly option play structure:

  • Open this play when the stock is near strike A.
  • Strike price A: Long call option. 
  • Strike price B: Sell two call options short.
  • Strike price C: Skip over. 
  • Strike price D: Long call option. 
  •  Strike prices are for the same month expiration and are equidistant.

Broken Wing Butterfly

This option play is used by a mildly bullish trader. An option trader would want the underlying stock to move to strike B and stop around that area.

If a broken wing butterfly is opened for a net credit the the break-even price level is located at strike C with the net credit received when establishing the strategy.

If a broken wing butterfly is opened for a net debit there are two possible break-even price levels:

  • Strike A with the net debit cost.
  • Strike C minus the net debit cost.

Maximum profit is capped to strike B minus strike A minus the net debit paid, or plus the net credit received.

Risk is capped to the difference between strike C and strike D minus the net credit received or plus the net debit paid.

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By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.