Broken Wing Butterfly

BWB is better when you have a directional bias along with a price target. Standard butterfly requires the stock to hit an exact price. BWB eliminates risk on one side, so if your directional bias is correct (e.g., bullish) and stock stays high, you keep the credit even without hitting the target.

Skip strike means moving the wide wing long option further from the body than normal butterfly spacing. Instead of equidistant wings (e.g., $75/$80/$85), you 'skip' a strike to create asymmetry (e.g., $70/$80/$85). The $70 is the 'skipped' strike.

For put BWB: the upside (above the narrow wing) has no risk when entered for credit. For call BWB: the downside (below the narrow wing) has no risk. The 'no risk' side is opposite to where the wide wing is located.

At the wide wing strike, you experience maximum loss. For example, if your put BWB has a wide wing at $70 and the stock closes at $70, you lose the full max loss amount (wide wing width - narrow wing width - credit received).

Put BWBs entered for credit are often permitted in registered accounts as they have defined risk. Call BWBs may have restrictions depending on the broker. Check with your specific broker, as policies vary. The defined-risk nature generally makes them acceptable.

Match the BWB type to your directional bias. Bullish → put BWB (no risk to upside). Bearish → call BWB (no risk to downside). The no-risk side should be in the direction you expect the stock to go if your target is wrong.

Options: (1) Widen the skip strike further (cheaper long option), (2) Move body closer to current price, (3) Wait for higher IV, (4) Accept small debit (≤$0.25). If you can't achieve credit, consider standard butterfly or iron condor instead.

Close the current BWB and open a new one with the body at the new target. This usually costs money (debit). Only roll if: (1) your thesis is still valid, (2) you have conviction on new target, (3) the cost is justified by remaining profit potential. Limit to one roll max.

BWB uses all options of the same type (all puts or all calls) with asymmetric wings. Jade lizard combines a short put with a short call spread (or vice versa). BWB focuses on butterfly profit at body; jade lizard is pure premium collection with one-sided protection.

Time decay works similarly at the body (positive theta). The difference is on the no-risk side: if stock is beyond the narrow wing, time decay is purely in your favor as all options decay toward zero. You simply wait for expiration to collect the credit.

In contango (normal), use standard 45 DTE entry. In backwardation (event-driven), near-term options may offer better credits. Analyze the term structure to find expirations where the BWB structure gets best relative pricing. Sometimes 30 DTE works better than 45 DTE.

Unbalanced BWB uses different ratios than 1-2-1 (e.g., 1-3-2). This can create unique payoff profiles or achieve credit when standard BWB can't. Used by experts seeking specific risk/reward shapes. Requires understanding of ratio spread risks.

Place put BWB body at expected support level for your portfolio. If market corrects to that level, BWB profits offset portfolio losses. No-risk upside means hedge doesn't cost if market rallies. Better than simple protective puts for specific target levels.

Use Iron BWB when you have high conviction on a specific trading range with no-risk on both extremes. Both put BWB (bullish) and call BWB (bearish) would need to be achieved for credit. Works best when stock is at middle of expected range with elevated IV.

Systematic criteria: (1) IV Rank > 35%, (2) 45 DTE available, (3) Clear directional bias with specific target, (4) Credit achievable with standard skip, (5) Max loss < 3% of portfolio, (6) No earnings in period. Run this filter across your watchlist weekly.