Broken-Wing Butterfly Strategy Explained

What is a Broken-Wing Butterfly?

A standard butterfly uses equal-width wings. A Broken-Wing Butterfly deliberately makes the wings unequal.

Standard Butterfly

Example strikes: $100 / $105 / $110. Both wings are $5 wide.

Broken-Wing Butterfly

Example strikes: $100 / $105 / $115. One wing is $5 wide and the other is $10 wide.

Mental model: “I want the target-price benefit of a butterfly, but I am willing to accept more risk on one side in exchange for a cheaper entry or better payoff elsewhere.”

Common call structure

Leg	Action	Example Strike
1	Buy 1 Call	$100
2	Sell 2 Calls	$105
3	Buy 1 Call	$115

All options use the same expiration.

When to use it

Situation	Fit?	Why
Expect stock near a target price	Good fit	Maximum profit generally occurs near the middle strike.
Want lower cost than a standard butterfly	Potential fit	The wider wing can allow a smaller debit or even a credit.
Have a directional bias	Good fit	Risk can be intentionally shifted away from the side you consider less likely.
Want perfectly symmetric risk	Poor fit	The entire point is asymmetric risk.
Do not understand multi-leg expiration risk	Advanced	The payoff is less intuitive than a standard butterfly.

Worked example

Assume a stock trades near $100 and you expect it to move toward $105.

Leg	Strike	Example Premium
Buy 1 Call	$100	Pay $6.00 = -$600
Sell 2 Calls	$105	Receive $3.50 each = +$700
Buy 1 Call	$115	Pay $0.75 = -$75

Net Credit = $700 - $600 - $75 = $25

This example enters for a small $25 credit instead of a debit.

Maximum profit

Maximum profit generally occurs if the stock finishes at the middle strike, $105.

Value of $100 Call at $105 = $5 × 100 = $500

Plus Opening Credit = $25

Maximum Profit ≈ $525

What happens below the lower strike?

If the stock finishes at or below $100, all calls expire worthless.

Profit Below $100 = Opening Credit = +$25

In this credit example, a large downside move does not create a loss at expiration.

Where does the risk appear?

The risk appears on the wider upper wing.

The lower wing is $5 wide:

$105 - $100 = $5

The upper wing is $10 wide:

$115 - $105 = $10

Because the upper wing is wider, a large rally can create a defined loss above the upper strike.

Maximum loss

At or above $115, the unequal wing widths create a net intrinsic loss.

Wing Difference = $10 - $5 = $5

Maximum Loss ≈ ($5 × 100) - $25 credit = $475

The strategy is still defined risk, but the risk is intentionally concentrated on one side.

Upper break-even

In this example, the profit declines after the middle strike and eventually reaches zero before the upper strike.

Upper Break-even ≈ $110.25

This comes from the $5.25 of peak value per share being given back as the position moves through the wider upper wing.

Expiration outcomes

Stock Price	Approximate Outcome
$95	+$25
$100	+$25
$103	+$325
$105	+$525 max profit
$108	+$225
$110.25	Break-even
$115 or higher	-$475 max loss

Broken-Wing vs. Standard Butterfly

Feature	Broken-Wing Butterfly	Standard Butterfly
Wing widths	Unequal	Equal
Risk	Asymmetric but defined	Symmetric and defined
Entry cost	Can be lower or a credit	Usually debit
Directional bias	Yes	Usually more neutral
Complexity	Higher	Lower

Broken-Wing Butterfly vs. Ratio Spread

Feature	Broken-Wing Butterfly	Ratio Spread
Extra protective option	Yes	No
Tail risk	Defined	Can be undefined
Target-price payoff	Yes	Yes
Beginner suitability	Advanced but safer	Lower due to uncovered risk

A Broken-Wing Butterfly is often a more controlled alternative to a ratio spread because the extra long option caps tail risk.

Volatility and time decay

Time decay

Can help if the stock stays near the middle strike as expiration approaches.

Volatility

Changes can affect all three strikes differently, so pre-expiration value can be complex.

Assignment risk

The two short middle-strike calls can be assigned before expiration if they become in the money.

Although both wings are protected by long calls, assignment can still create temporary stock positions or buying-power requirements.

Pros and cons

Pros

Defined risk.
Can be entered for very little cost or a credit.
Strong profit potential near a target price.
Can express a directional bias.
Safer tail profile than a ratio spread.

Cons

More complex than a standard butterfly.
Risk is intentionally asymmetric.
Requires accurate target and timing.
Assignment risk exists on short options.
Pre-expiration pricing can be difficult to estimate.

How to close it

Close the full butterfly as one multi-leg order when possible.

Close: Sell to Close both long calls and Buy to Close the two short middle calls.

Common mistakes

Assuming “credit” means the trade cannot lose.
Not calculating which side contains the wider wing.
Using the wrong wing direction for the market outlook.
Ignoring assignment near expiration.
Comparing it to a standard butterfly without accounting for asymmetric risk.
Failing to calculate the maximum loss before entry.

Beginner checklist

Check	Question
☐ Target	What price do I expect at expiration?
☐ Wing widths	Which side is wider, and why?
☐ Entry credit/debit	Am I entering for a debit or credit?
☐ Max profit	Where is the payoff peak?
☐ Max loss	What is the exact defined loss on the broken wing?
☐ Break-even	Where does the wider-wing side become unprofitable?
☐ Assignment	What happens if the short calls are assigned?
☐ Alternative	Would a standard butterfly be simpler?

Key takeaway

Broken-Wing Butterfly = Butterfly with Unequal Wing Widths

Use it when you have a specific target price plus a directional bias and want defined risk with potentially lower entry cost.

The central trade-off is: better pricing or payoff on one side in exchange for intentionally more risk on the other side.