The Broken Wing Butterfly Spread, also known as a Skip Strike Butterfly Spread, is
neutral options strategy and is a variant of the Butterfly Spread options trading strategy. The Broken Wing Butterfly Spread
is simply a butterfly spread with risk inclined to one side. This means that rather than an equal risk when the stock breaks out
to topside or downside, the Broken Wing Butterfly Spread transfers all the risk in one direction onto the other in order to create
a options trading risk profile with maximum loss when the stock goes either upwards or downwards and totally safe when the stock goes in
the protected direction.
The Broken Wing Butterfly Spread also differs from the Butterfly Spread in that it is usually put on as a zero cost spread or credit spread.
The main purpose of a Broken Wing Butterfly Spread options trading strategy is simply to adjust the risk profile of a regular butterfly spread.
A regular butterfly spread makes a loss when the stock breaks out to either direction. A Broken Wing Butterfly Spread enables you to totally
transfer the risk of one direction onto the other. This is useful when you wish to speculate on a stock being stagnant but that you are
confident that if the stock should break out, it will do so only in a certain direction.
The Broken Wing Butterfly Spread options trading strategy does this by simply buying out of the money options with a further strike price from the middle strike than the in the money leg. A regular butterfly spread would have both out of the money options and in the money options at an equidistance strike price from the middle strike.
|Regular Butterfly Spread
|Broken Wing Butterfly Spread
|Two long strikes at equidistance from middle strike
|Out of the money strike is further from the middle strike
|Zero Cost or Credit Spread
|Lower margin requirement
|Higher margin requirement
|Lower Maximum Loss/Profit
|Higher Maximum Loss/Profit
Please click on the respective risk graph to learn about each variant of the Broken Wing Butterfly Spread.
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