Also Known as a Skip Strike Butterfly
Directional Assumption
Neutral to Bullish
A Broken Wing Butterfly is a variant of a Butterfly with a higher probability of profit, but has more risk. We can somewhat be directionally wrong and still make money.
The long strikes are not equidistant like a normal butterfly.
When to Run It
I am anticipating that the price of the underlying stock goes up.
If the price of the stock goes down and past the breakeven point, I may be assigned the short put and will owe a defined loss.
Setup
- – Buy Put (above short strike)
- – Sell 2 Puts
- – Buy Put (below short strike)
NOTE: All options have the same expiration month.
Timeline
30-60 days
Ideal Implied Volatility
** 50% or greater**
Short puts allow me to capitalize when anticipating a decrease in
implied volatility (IV).
Profit Target
Butterflies need time and volatility contraction in order to make money. If my position shows a profit near 25% of the max potential gain, I will close the position early to lock in profits.
Time Decay
As time goes by theta works in my favor as I collect premium as long as the price stays above the short put strike price.
Maximum Profit
Potential profit is limited to the net credit received.
Maximum Loss
This is a defined risk trade.
Width of narrower spread plus Credit Received
Risk Management
This trade can be 3-5% of my account.
