Broken Wing Butterfly — a butterfly whose risk sits on one side only

What is a broken wing butterfly?

A broken wing butterfly is a butterfly with unequal wings: one outer strike is pushed further out. That makes the position cheaper, often a credit rather than a debit — and it moves the entire risk onto the side carrying the wide wing.

Key takeaways

• A broken wing butterfly relocates the risk to one side rather than removing it.
• In the credit version the narrow side carries no loss; the wide side does.
• The maximum loss is the difference between the wing widths less the credit.
• The wide wing belongs on the side whose move you consider less likely.

The question to answer before you open the trade: Which side can you genuinely rule the big loss out on?

A simple mental model: the bet that can only hurt on one side

You bet a neighbour on when today's delivery will arrive. You agree three marks: nine o'clock, ten o'clock, twelve o'clock. If it comes before ten, nothing further happens — you simply keep the money your neighbour paid you to take the bet. If it comes at exactly ten, you make the most. Later than that and you pay some of it back with every half hour, until twelve. Past twelve it makes no difference how late it gets: that is the most it can cost you.

What separates this from an ordinary bet on a single moment is the shape of the windows. One hour is open on the early side, two hours on the late one. And because the late side stands twice as far open, your neighbour pays you to take the bet instead of the other way round.

Four things follow, and together they are the whole broken wing butterfly:

• You are paid to open it rather than paying to open it.
• On the early side nothing can go wrong — that payment simply stays with you.
• You earn the most at one exact time, not across a stretch of time.
• The entire possible loss sits on the late side, and it is far larger than what you were paid.

Where the picture ends: a delivery arrives once and the matter is settled. Your position can be bought back any day, and its price moves constantly — with the share price, the time left and the expected swing. The other side can also call the bet in early here: the two options you sold in the middle can have your shares called away before the settlement date arrives at all.

How does a broken wing butterfly work?

The driver is time decay on the two sold options in the middle — the way an option loses, day by day, the part of its price that is there purely for waiting. Exactly as on a regular long call butterfly. The difference sits in a single strike.

On a regular butterfly both bought options sit equally far from the middle. On a broken wing you push one of them further out. That option is cheaper, so the whole construction is cheaper — often far enough that you are paid to open it rather than paying. That is all a credit means: the net amount lands in your account instead of leaving it.

The discount is bought with asymmetry. The far-out wing starts protecting later than the near one, and in the gap between them a loss appears that a regular butterfly does not have. The directional tilt is therefore not a side effect but the substance: you are stating not only where price should land, but which way it must not break out.

What works against you is movement, but now on one side only. On the narrow side nothing can happen in the credit version; on the wide side the whole loss is waiting.

If you remember one thing: a broken wing butterfly removes no risk, it sweeps it to one side.

How is a broken wing butterfly constructed?

1. +1 Call @K_low
2. -2 Call @K
3. +1 Call @K_high (unequal wing width)

The two sold calls in the middle sit on your price target. One bought call sits close below, the other considerably further above. That inequality is the entire construction.

Which side gets the wide wing is the real decision. In the call version shown here the narrow wing is below and the wide one above: you rule out a large loss to the downside and accept it to the upside. A bearish stance builds the mirror image from puts.

Worked example

An example stock trades at 100 €. You buy the 100 € call, sell two 105 € calls and buy the 115 € call. The narrow wing is 5 € wide, the wide one 10 €. For the whole construction you collect 0.50 € per share, a 50 € credit per contract.

Below 100 €: you keep the credit. All three calls expire worthless and the 50 € stays with you. That is the property that made this strategy famous — and the one routinely misread as "risk-free".

Maximum profit: 5.50 € per share, or 550 € per contract — the narrow wing plus the credit, reached exactly at 105 €.

Upper break-even: 110.50 €. Above 105 € the result falls by one euro for every euro of price; at 110.50 € the position is flat.

Maximum loss: 4.50 € per share, or 450 € per contract — the difference between the wing widths (10 € less 5 €) less the credit. You reach it at or above 115 €, and it stops there: at 140 € the loss is the same as at 115 €.

The data behind this page describes the break-even as "construction-dependent, must be simulated". That does not mean it cannot be computed: for the strikes and credit shown here it sits exactly at 110.50 €. It means no single formula covers every wing combination and both the credit and debit variants. Compute it for your own construction rather than borrowing one from another.

• Run your own numbers: Break Even Multi Leg Calculator →

When is a broken wing butterfly worth it?

Market phases it suits

• Sideways
• Moderate uptrend
• Moderate downtrend

Goal

• Income
• Speculation

A broken wing butterfly fits a sideways market and, thanks to its built-in tilt, a moderately directional one as well. It is the most flexible strategy in this family: by choosing which side gets the wide wing, the same construction can be set up neutral, mildly bullish or mildly bearish.

On volatility it wants medium to high implied volatility, because the two sold options in the middle then bring in more — and the more they bring in, the more likely the debit turns into a credit.

Its purposes are income and speculation, which places it between the classic butterfly, a pure bet on a price target, and the premium-selling strategies.

The greeks on a broken wing butterfly

Short version: delta depends on the construction, negative gamma, positive theta, negative vega. Delta is the interesting one here. Unlike a symmetric butterfly the position does not start at zero; it carries whatever tilt you built in. How large that tilt is depends entirely on how far out you pushed the wide wing.

Management

The loss limit is phrased unusually on this strategy: close before price reaches the wide side. It names a price rather than an amount, and that fits the construction. Because the entire risk lives in the zone between the middle strike and the wide wing, the relevant question is not "how much loss can I take" but "at what price do I no longer want to be in this".

In the example that zone runs from 105 € to 115 €. A sensible level sits inside it, not beyond it — waiting until 115 € means already holding the maximum loss.

The 25–50 % profit target is the same reasoning as on a symmetric butterfly: the full amount exists at one point and only at expiration.

Assignment and capital

Assignment risk

medium

Capital required

medium

Typical expiration

30-60

Typical delta

construction-dependent

The assignment risk is medium and sits on the two sold calls in the middle. If exercised, they create a 200-share short position that the two bought calls cover but that still has to be unwound. The probability rises sharply before an ex-dividend date.

The capital requirement is medium: the broker typically holds the maximum loss, 450 € per contract here. The credit collected does not change that — it is income, not collateral.

What a broken wing butterfly does not mean

• "No risk on one side" does not mean no risk. Below 100 € the credit stays with you, true. Above 115 € sits a 450 € loss — nine times what you collected. The loss is defined, but it is real and much larger than the income.
• The maximum gain is not a result you can plan around. The 550 € exists at exactly 105 € and only at expiration. What you realistically take is a slice of the curve, which is why the usual targets sit at 25 to 50 percent of the maximum.
• A credit is not collateral. The 50 € is income, not a buffer the broker credits you. What gets held is still the 450 € maximum loss.
• A broken wing butterfly is not neutral, however neutral it looks. The moment one wing sits further out, the position carries a directional statement. Treating it as directionless means skipping the actual decision.
• A price below the middle strike is not the good outcome. It is the scenario where you lose least, not the one you built the structure for. The maximum sits in the middle, and price still has to get there.

Which mistakes cost money on a broken wing butterfly?

Read as a "risk-free butterfly". The single typical mistake the data names, and it grows out of a half-truth. True: in the credit version there is no loss on the narrow side. False: the conclusion drawn from it. On the wide side sits a loss that in the example is nine times the credit. Collecting 50 € while risking 450 € is not a free trade, it is a very asymmetric one.

Wide wing on the wrong side. The construction forces a directional statement even when it looks neutral. Placing the wide wing above while the underlying is in an uptrend sweeps the risk to exactly where the movement is likely.

Break-even borrowed from another construction. There is no general formula. Two broken wing butterflies with the same middle strikes but different wing widths have different break-evens. Recompute it every time.

Three strikes in thin liquidity. As on any butterfly, three strikes mean three bid-ask spreads. On a 50 € credit, the fill decides whether the position opens as a credit at all — and therefore whether it has the property you chose it for.

Feynman check: explain a broken wing butterfly without jargon

Explain to someone in three sentences what you are doing. Do it without the words "strike", "credit", "wing" and "volatility".

Your explanation is complete when it contains four things:

1. Are you paid at entry or do you pay — and why?
2. At which single price do you earn the most?
3. Which side can do you no harm, and which side holds the entire loss?
4. How large is that loss compared with what you were paid?

One possible explanation: "I was paid 50 € to take on a bet. If the stock stays below 100 €, I keep the 50 € and nothing else happens. If it finishes at exactly 105 €, I make the most, 550 €. If it climbs further it gets expensive: from 115 € upward I am down 450 €, and it stops there however much higher the stock goes."

If the word "risk-free" turns up in your explanation, that is exactly where the gap is. Go back to the worked example: 50 € collected against 450 € at risk. That is not a free trade, it is a very lopsided one.

Five questions before you enter

1. Which side can I genuinely rule the large move out on — and what am I basing that on?
2. Is the underlying currently trending in exactly the direction I pushed the wide wing?
3. Did I compute the break-even for my own construction rather than borrowing one from another?
4. At which price between 105 € and 115 € do I close — and is that level fixed before I enter?
5. Is the fill good enough that the position actually opens as a credit at all?

Broken Wing Butterfly or Long Call Butterfly: what is the difference?

This data-driven table lays out the differences that actually matter between Broken Wing Butterfly and Long Call Butterfly.

Broken Wing Butterfly compared with Long Call Butterfly

Criterion	Broken Wing Butterfly	Long Call Butterfly
Market phase	Range-bound, no trend, price oscillating between levels, Basing out, or a quiet upward drift or Topping out, or a quiet downward drift	Range-bound, no trend, price oscillating between levels or After a volatility spike, with a return to normal expected
What pays you	Time decay	Time decay
Risk defined	Yes	Yes
Max profit	narrow width minus the debit, or narrow width plus the credit, at the middle strike	the spread width minus the debit paid
Max loss	(the width of the wide wing minus the width of the narrow wing) minus the credit received	the debit paid
Capital required	medium	very low (equal to the debit)
Approval level	3	3

In short: Broken Wing Butterfly fits when the market phase is Range-bound, no trend, price oscillating between levels, Basing out, or a quiet upward drift or Topping out, or a quiet downward drift and the goal is Income or Speculation; Long Call Butterfly fits when the market phase is Range-bound, no trend, price oscillating between levels or After a volatility spike, with a return to normal expected and the goal is Speculation or Trading volatility.

Related strategies

These strategies solve a similar problem — the counter position is the inverse.

Long Call Butterfly→

Neutral with a price target · Range

Do you have a precise price target - not just a direction?

Jade Lizard→

Neutral to mildly bullish · Range

Is the credit genuinely larger than the width of the call spread?

Counter position: Long Strangle→

Direction-neutral, needs a very big move · Movement

Is the expected move large enough to reach one of the two break-evens?

From theory to a real trade

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