Broken Winged Butterfly
A broken wing butterfly is an options position built from three strike prices, like a normal butterfly spread, except the distance between the strikes is uneven on one side. That uneven spacing is the "broken wing" — it changes the risk on one side of the trade while leaving the other side intact.
A regular butterfly is built by buying one option, selling two options at a further strike, and buying one more option even further out, with the gaps between strikes equal on both sides. It costs money to put on and has a small, defined max loss on both sides. A broken wing butterfly widens one of those gaps. Widening the gap on the side you don't expect the price to go lets you collect more money upfront, often enough that the trade has little or no cost to open, sometimes even a credit. In exchange, the side with the wider gap now carries a larger potential loss if the price moves against you in that direction.
The trade is typically built using calls (for an upside-skewed view) or puts (for a downside-skewed view), and the strikes at the center are sold as a pair while the outer strikes are bought. The "financing" side — the wider gap — is what removes or reduces the upfront cost of the trade, and it's also the side where risk is no longer symmetric.
The nuance that trips people up is that removing risk from one side always adds it to the other. A broken wing butterfly is not "safer" than a normal butterfly; it's a normal butterfly with the risk deliberately shifted so it costs less (or nothing) to enter, on the assumption the price won't move toward the wide side. If it does, the loss can be larger than a standard butterfly's, and in some constructions can approach the width of the wider strike gap minus any credit received.
Day traders use broken wing butterflies to express a directional view with little or no cash outlay, but the tradeoff is a lopsided loss if price runs the "wrong" way fast — something that matters a lot when managing risk intraday or into a specific event like earnings.
Suppose a stock trades at 100. A trader buys a 95 call, sells two 100 calls, and buys a 110 call (instead of a 105 call, which would make it a normal, symmetric butterfly). The wider gap on the upside (100 to 110) brings in more credit from the structure, which can make the whole trade cost close to zero, or even pay the trader a small credit, versus paying a net debit for the symmetric 95/100/105 version. If the stock stays near 100 or drifts down toward 95, the trade behaves like a normal butterfly. If the stock instead rallies sharply past 110, the loss on the wide side can be meaningfully larger than the loss a symmetric butterfly would have produced.
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