Broken Wing Butterfly

A standard butterfly has equal wing widths (symmetrical). When one wing is intentionally made wider, the symmetry is 'broken' - hence 'broken wing.' The wider wing changes the risk/reward profile and creates directional bias.

Neither is universally 'better.' Standard butterflies are neutral and have risk on both sides. BWBs have directional bias and can eliminate risk on one side. Use BWB when you have directional conviction; use standard butterfly when expecting price to stay exactly at middle strike.

A small debit entry is acceptable but means you have some risk on both sides. The smaller the debit, the less risk on the intact side. Aim for debit less than 20% of intact wing width. If debit is larger, consider adjusting strikes.

Put BWBs are more commonly traded because: (1) Markets have a long-term bullish bias, (2) Put skew makes put BWBs easier to enter for credit, and (3) Most traders are naturally more comfortable with bullish positions. However, call BWBs are valuable in bearish environments.

A vertical spread (bull put or bear call) has constant profit if underlying moves in your favor. A BWB has MAXIMUM profit at a specific price (middle strike) with a tent-shaped profile. BWB has higher max profit potential at target but requires more precision.

Start with 2:1 ratio (broken wing twice as wide). Adjust based on: (1) Credit/debit achieved - go wider if need more credit, (2) Risk tolerance - narrower if want less max loss, (3) Conviction level - wider broken wing if highly confident in direction. Test different ratios to find your preference.

Yes, but carefully. Roll OUT in time (same strikes, further expiration) if thesis intact. Rolling the middle strike is more complex - essentially closing and reopening. Consider closing broken wing spread only to convert to simple vertical. Avoid rolling just to avoid loss.

BWBs have concentrated exposure at the middle strike (2 short options). Near expiration, gamma at this strike becomes very high, making the position extremely sensitive to price moves. A small move can swing P&L dramatically. Exit before this gamma acceleration (14-21 DTE).

Rarely. The only good reason is if underlying is exactly at middle strike and you want max profit. Even then, gamma risk makes this dangerous. Most traders exit at 50-75% profit or 14-21 DTE, whichever comes first. Pin risk (uncertainty at expiration) is real.

IV crush (IV decreasing) generally helps BWBs due to negative vega at the middle strike. Your short options lose value faster than your long options. This is why entering when IV is elevated is beneficial - you profit from both theta and vega as IV normalizes.

Use expected move (1 standard deviation) for strike placement. Place middle strike at 0.5-1 SD from current price (probability of reaching ~30-40%). Place broken wing at 1.5-2 SD (probability of breach ~10-15%). This mathematically optimizes the probability-weighted expected value.

Convert when: (1) You want balanced exposure and your directional view has moderated, (2) The intact side has moved into profit and you want to add the opposite side for more premium, (3) You want to reduce directional risk while maintaining income. Add opposite BWB or simple spread.

Track aggregate exposure by direction. Sum all broken wing notional exposure (e.g., all put BWB downside risk). Set portfolio limits (e.g., max 15% of portfolio at risk from correlated broken wings). Diversify across uncorrelated underlyings. Consider offsetting with opposite-direction BWBs.

NEVER enter BWBs BEFORE earnings - gap risk through broken wing is too high. Enter 1-3 days AFTER earnings when: (1) Direction is clearer, (2) IV has crushed but some premium remains, (3) Stock is consolidating at new level. Place middle strike at new support/resistance.

Wider intact wing: Higher max profit (more spread value at middle strike), but harder to achieve credit entry (need wider broken wing or accept debit). Narrower intact wing: Easier credit entry, lower max profit. The intact width primarily affects max profit; broken wing width affects credit and max loss.