Broken Wing Butterfly

A long butterfly with one wing wider than the other. By stretching the far wing, the credit-spread half of the structure over-finances the debit-spread half — so a put broken wing butterfly can often be opened for a net credit, eliminating the risk on one side entirely (commonly no risk to the side the credit faces) and leaving a single, defined, capped loss on the wider-wing side. It is the defined-risk cousin of the ratio spread: a directional-to-neutral premium trade with a known worst case.

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1. Overview & Purpose

A broken wing butterfly (commonly shortened to "BWB," also called a "skip-strike butterfly") is a three-strike, defined-risk options structure built like a standard long butterfly — buy one, sell two, buy one — except the two long wings are not equidistant from the short (body) strike. It is defined precisely as "a long butterfly spread with long strikes that aren't equidistant from the short strike," which makes it "slightly more directional than a standard long butterfly spread."

The structural trick is to view the butterfly as a debit vertical spread plus a credit vertical spread sharing the same short strike, then make the credit spread wider than the debit spread. Put another way, the BWB "works as a debit spread + a credit spread with short options on the same strike, where the credit spread is wider," and "the debit spread portion of the trade is more narrow than the credit spread portion of the trade." The widened side is the "broken wing," and it "completely finances the cost of the debit spread portion," generating "a net credit upfront."

That single design choice produces the strategy's headline benefit. Because you collect a credit at entry, "there's no risk to the downside in this scenario, since you're collecting premium upfront" — the BWB "eliminates the risk of losing money if the entire spread expires OTM," which "drastically improves our probability of profit."

So the purpose is to take the high-POP, pin-the-body profit profile of a butterfly and remove its weakest feature — the small debit you forfeit when price drifts away from the body on the "safe" side. By skewing the wings for a credit, you keep a payout if you are simply right about direction (price stays on the credit side) and you cap the loss on the directional-risk side at a known dollar figure. It belongs to the short-premium, high-IV school alongside the ratio spread and the jade lizard, but unlike the front-ratio it is fully defined-risk. It is best framed as "a high IV, directionally neutral strategy." See 03_implied_volatility for IV-rank and skew framing and 02_probability for the POP mechanics.

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2. Structure & Payoff

A BWB uses all calls or all puts, one expiration, one underlying, across three strikes. Let the body (short) strike be B, the narrow (debit-spread) width be n, and the wide (credit-spread) width be w, with w > n.

Put broken wing butterfly (the canonical build — bullish-to-neutral lean, opened for a credit):

Read as two verticals sharing strike B: a narrow debit put spread (long B+n / short B, width n) and a wide credit put spread (short B / long the far wing, width w). The wide credit spread out-collects the cost of the narrow debit spread, so the package comes in for a net credit.

A call broken wing butterfly is the mirror image (buy 1 call near, sell 2 calls at body, buy 1 call far above) and leans bearish-to-neutral, removing upside risk when done for a credit. In equity indices, the put version is favored because put skew makes the far OTM put rich, financing the structure more easily — the same skew edge taught for ratio spreads.

ASCII payoff at expiration — put BWB opened for a credit (body B, narrow width n up to B+n, broken wing far below):

The defining visual is an asymmetric tent: it peaks at the body B, holds a flat credit shelf with no risk on the near-wing (credit) side, and falls to a capped, flat maximum loss beyond the far (broken) wing. The "loss is capped at the furthest OTM long option." Contrast the symmetric tent of a balanced iron/long butterfly, which has a small debit loss on both sides; the BWB trades a wider one-sided loss for zero loss on the other side.

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3. When to Use

Neutral-to-slightly-directional thesis. Use a BWB when you expect the underlying to drift toward or pin near the body strike, or simply to not run hard against the broken-wing side. It is ideal when traders expect "neutral / slightly directional" moves and want high probability of profit with defined risk.
High implied volatility. The guidance is "preferably to set up broken wing butterflies in high implied volatility (IV) environments," because the structure "benefit[s] from a decrease in volatility." Elevated IV also makes the far wing richer, helping the credit-spread half finance the debit-spread half. See 03_implied_volatility.
You want a credit with no risk on one side AND defined risk on the other. This is the BWB's reason for existing: the credit removes one side's risk while the far long wing caps the other side — a defined-risk way to get the ratio-spread payoff without a naked tail.
Small / IRA / cash-secured accounts that cannot hold a naked short. The front-ratio spread solves the same skew/credit problem but with undefined risk; the BWB is the defined-risk substitute, the standard way to run "a ratio spread with defined risk."
Around earnings or a known catalyst, as a defined-risk way to sell elevated IV with a directional tilt. Researchers have run BWBs head-to-head against strangles into single-name earnings.

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4. When NOT to Use

*When you expect a violent move through the broken-wing side.* The capped loss still materializes if price blows past the far wing; the asymmetric tent turns into the max loss there. If your real fear is a crash on the put side, the put BWB's broken wing is exactly where the loss lives.
Low IV-rank environments. With thin premium, the far wing may not fully finance the debit spread, forcing a debit entry that reintroduces small risk on the "safe" side and defeats the credit rationale. The "high IV" guidance implies low IV is a poor fit.
When skew fights the side you want to sell. A call BWB in an equity index battles the put-skew tailwind, so the far call wing finances poorly — "skew simply doesn't favor call" broken-wing structures in index products. Prefer the put BWB there.
When you want a symmetric, purely neutral payout. If you have no directional lean at all and want equal treatment of both tails, a balanced iron butterfly or iron condor is the cleaner expression; the BWB deliberately skews risk to one side.
When the credit is trivial relative to the wide-side risk. If breaking the wing only buys a few cents of credit but adds a large far-wing loss, the trade-off is poor — the wing skew must be paid for by a meaningful credit and POP improvement.

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5. Entry Criteria

See 03_implied_volatility for IV-Rank/skew and 02_probability for delta-as-probability strike selection.

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6. Greeks Exposure

A credit put BWB near entry is a short-premium, mildly directional structure. Signs (per one-lot, body near or just below price):

Canon to internalize: the directional lean is chosen by where you put the wide wing. Break the lower wing (put BWB) for a bullish-leaning, no-upside-risk trade; break the upper wing (call BWB) for a bearish-leaning, no-downside-risk trade. The same "Greeks shift with the structure" caution from ratio spreads applies — re-read the Greeks before adjusting.

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7. Volatility Exposure

The BWB is net short vega — a short-volatility position that "benefit[s] from a decrease in volatility."

IV expansion (bad): rising IV inflates the net-short body faster than the long wings gain, marking an unrealized loss even with price unchanged. Because the structure is defined-risk, the vega damage is bounded by the capped loss.
IV contraction (good): falling IV (volatility crush) is a tailwind alongside theta, which is why high-IV entry is canon — you want IV mean-reverting downward.
Skew is the second-order edge. Selling the far wing on the skewed (high-IV) side — puts in equity indices — collects disproportionate premium, making the credit easier to achieve and letting you place the broken wing further out. This is the same skew insight that drives ratio spreads.

Conflict to flag honestly. Like the front-ratio, the BWB is short vega yet also benefits from a favorable directional move (toward the body). Treat the vega label as net, not absolute — it is a short-vol trade with built-in directional convexity, not a pure short-vol play. See 03_implied_volatility.

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8. Expected Behavior

Let B = body strike, n = narrow (debit) width, w = wide (credit) width, C = net credit received (per share; ×100 per contract). The formulas:

Max profit = n + C ("width of narrower debit spread + credit received"), realized when the "stock price is right on the short strike [B] at expiration."
Max loss = w − n − C ("width of credit spread − width of narrow debit spread − credit received"), capped at the furthest-OTM long option (the broken wing).
Breakeven (put BWB, net credit): (B − n) − C ... the put breakeven is stated as "(short strike − width of narrower debit spread) − credit received." On the credit (upside) side there is no breakeven in the loss sense — the credit is kept above the body.
Breakeven (call BWB, net credit): (B + n) + C — "(short strike + width of narrower debit spread) + credit received."
P/L drivers: positive theta (primary), IV contraction (secondary), and price sitting near the body / on the credit side. Working against you: a hard move through the broken wing, and IV expansion.

Probability of profit. The credit entry "drastically improves our probability of profit" versus a balanced butterfly, because the trade wins across the entire no-risk credit shelf plus the tent up to the broken-wing breakeven — a wide band. The cost is a single, capped, but relatively wide loss on the broken-wing side. Recall the house caveat that delta-based POP can overstate realized win rates — size for the capped loss actually occurring. See 02_probability.

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9. Capital Requirements / Buying Power

As a defined-risk structure, the BWB's buying-power reduction equals its maximum potential loss, not a naked-margin requirement — the key capital advantage over the front-ratio spread, whose extra naked short is margined like a short option.

BPR ≈ max loss = (w − n − C) × 100 per contract — the wide-side cap. There is no additional requirement for the credit (no-risk) side, since you cannot lose there.
Known worst case → IRA/small-account friendly. Because both the BPR and max loss are fixed at entry, the BWB is the defined-risk way to express a ratio-spread thesis in accounts that cannot hold naked options.
Capital-efficient relative to credit collected, since you receive a credit and tie up only the modest wide-side difference. Widening the broken wing increases both credit and max loss — tune the trade-off deliberately.

See 06_portfolio_management for sizing this BPR against net liquidity and aggregate portfolio delta/theta, and 08_defined_risk for the defined-risk family.

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10. Adjustment Criteria

The BWB's only real risk is a move into and through the broken-wing side. Defenses, in rough order of preference:

Harvest the debit spread, roll the credit spread out in time. The stated defense: if the trade goes against you, "close our long spread aspect of the trade for max profit, and potentially roll the remaining short spread out in time" — banking the narrow debit-spread value and giving the residual short spread more duration to recover.
Roll the whole structure out at ~21 DTE for a credit, resetting duration and reducing the accelerating negative gamma around the body. `Grade B · Conf High · Research-backed · src: [05_trade_management]`
Re-center by rolling the body / wings toward the new price to chase a drifting underlying, keeping the structure for a net credit where possible. Dedicated segments walk through BWB management examples — turning BWBs into adjusted structures across different names.
Because the loss is already capped, many traders treat the BWB as a manage-by-target / let-the-wing-cap-work trade rather than one to grind through many rolls — the defined-risk wing is itself the primary defense.

See 05_trade_management for the unified rolling and 21-DTE framework.

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11. Exit Criteria

Profit target ≈ 50% of max profit. The house guidance targets "50% max profit," and specifically notes taking profit when the "closest long option to the stock price goes ITM near expiration." This matches the firm-wide managing-winners default for credit/short-premium structures. See 05_trade_management.
Manage at ~21 DTE regardless of P/L. Close or roll near 21 days to expiration to escape accelerating gamma around the short body. `Grade B · Conf High · Research-backed · src: [05_trade_management]`
Defense, not a hard stop. Because the loss is capped at the broken wing, there is no undefined tail to stop out — the discipline is to harvest the debit half and roll the credit half (Section 10) if price threatens the broken-wing side, rather than passively absorbing the full capped loss.
Close before expiration to avoid pin/assignment risk at the body strike, where two short options sit.

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12. Historical Research Findings

Sourcing note: industry pages on the `/shows/.../episodes/` path reliably return HTTP 404 to automated fetching (confirmed during research), and the substantive results are presented on-screen in video rather than as text. Findings below are reported from real, indexed episode URLs and domain-restricted summaries; quantitative specifics are tagged Conf Med accordingly. No URL is fabricated.

Does breaking a wing raise the probability of success? A dedicated research segment, "Butterflies: Breaking a Wing" (2017-05-18), tackled exactly this question — whether skewing the wings to bring in a credit improves the win rate versus a balanced butterfly. The structural logic (credit removes one side's risk and "drastically improves our probability of profit") is the conclusion that research supports.
Short-DTE vs. longer-DTE BWBs and skew. A "Butterfly Week — Broken Wing Butterflies" segment (2020-11-09) walked through "the strategy differences between long and short-term DTE broken wing butterflies," explained "how the math works," and "what to expect with different skewed markets" — reinforcing that skew choice and DTE materially change the trade.
BWB as an earnings vehicle vs. a strangle. A "LULU Earnings: BWB vs. Strangle" segment (2019-09-05) compared a defined-risk BWB against a short strangle into a single-name earnings event — evidence the BWB is used as a defined-risk alternative for selling event IV.
A standing strategy guide exists. A "Broken Wing Butterfly — Strategy Guide" (2017-05-15) was published, and the structure has its own dedicated concepts page — evidence the BWB is taught core curriculum, not a one-off. It is repeatedly described as a favorite of experienced mid-day educators.

Honest limitation. These are video segments, not downloadable backtest papers; precise win-rate and P/L-per-day statistics are shown on screen and are not text-extractable here. The directional conclusions (credit removes one side's risk, raises POP, high-IV instrument) are robust house canon; the exact numbers are not independently reproduced in this entry.

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13. Worked Example

Adapted from a standard teaching example (a call BWB for a credit).

Setup — XYZ, elevated IV, ~45 DTE:

Narrow debit spread: 100 → 105, width n = 5.
Wide credit spread: 105 → 120, width w = 15 (the broken wing).
Net credit (C): \$1.00 (\$100 per one-lot) — the wide 105/120 spread fully finances the 100/105 debit spread and leaves a credit.

Math (the standard formulas):

Max profit = n + C = 5 + 1 = \$6.00 (\$600) — only if XYZ closes exactly at the 105 body at expiration.
Max loss = w − n − C = 15 − 5 − 1 = \$9.00 (\$900) — capped, realized at/above the 120 broken wing.
Upper breakeven (call BWB) = (B + n) + C = (105 + 5) + 1 = \$111.
Downside: no risk — the credit is kept if XYZ sits at/below 100 (the no-risk shelf).
Buying power reduction ≈ max loss = \$900 per one-lot.

Outcomes at expiration:

Interpretation. The trade wins across everything at/below 100 (credit kept) and up the tent to 111, peaking at the 105 body. The price of that broad win zone is a single, capped \$900 loss above 120 — never an open-ended tail. Management (house practice): take ~50% of max profit (≈ \$300, buying the fly back near a \$3.00 debit), manage by ~21 DTE, and if XYZ runs toward 105–110 close the long 100/105 debit spread for its gain and roll the residual 105/120 short spread out in time.

Put-BWB mirror. On a \$100 stock with put skew, a put BWB — buy 1 put @ 100, sell 2 puts @ 95, buy 1 far put @ 80 — opens for a credit with no upside risk, max profit if price pins 95, and a capped loss below the 80 broken wing. Same machine, bullish lean.

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14. Key Takeaways

A BWB = a long butterfly with one wing wider than the other (buy 1 / sell 2 / buy 1, non-equidistant). The wider "broken wing" finances the narrow debit spread, so the structure can be opened for a net credit.
The credit removes the risk on one side entirely (commonly no upside risk for a call BWB / no downside risk for a put BWB) and "drastically improves our probability of profit"; the loss on the broken-wing side is defined and capped.
Max profit = narrow width + credit (price pins the body); max loss = wide width − narrow width − credit (capped at the far wing); breakeven = body ± narrow width ± credit on the broken-wing side.
Enter in HIGH IV, ~45 DTE. You are short vega, positive theta, with a directional lean set by which side the wide wing is on — break the lower wing for a bullish put BWB, the upper wing for a bearish call BWB.
Manage at ~50% of max profit and by 21 DTE; defend a move into the broken wing by harvesting the debit spread and rolling the short spread out — the cap is itself the backstop.
It is the defined-risk cousin of the ratio spread and a sibling of the jade lizard: same skew/credit edge, but with a far long wing that caps the tail — the right pick when naked risk is unacceptable.

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15. Sources

Broken Wing Butterfly Options Strategy (definition, formulas, IV, management, worked example) — https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
Butterflies: Breaking a Wing — research segment (2017-05-18) — https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
Butterfly Week — Broken Wing Butterflies — research segment (2020-11-09) — https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
Broken Wing Butterfly — Management Examples — research segment (2019-09-26) — https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
LULU Earnings: BWB vs. Strangle — research segment (2019-09-05) — https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
Broken Wing Butterfly — Strategy Guide (2017-05-15) — https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
What is Gamma in Options Trading? (negative-gamma / 21-DTE rationale) — https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
Options Delta Explained (delta-as-probability overstatement caveat) — https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
broker education — How To Close A Butterfly Spread — https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document
Data Driven Options (third-party explainer) — 21-Day Broken Wing Put Butterfly (put-skew / defined-risk-ratio relationship) — https://datadrivenoptions.com/strategies-for-option-trading/favorite-strategies/broken-wing-put-butterfly/
Internal cross-references: 14_ratio_spreads, 09_strangles (jade lizard), 10_iron_condors, 08_defined_risk, 05_trade_management, 03_implied_volatility, 02_probability, 06_portfolio_management

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_Evidence-labeled per the Project Charter. Education only, not financial advice._