Broken Wing Butterfly
A butterfly with one wing widened, turning it into a credit trade that removes risk on one side entirely.
What is a Broken Wing Butterfly?
A Broken Wing Butterfly (skip-strike butterfly) is a standard butterfly with one wing moved further out, so the two wings are unequal. This asymmetry usually turns the trade into a net credit and eliminates the risk on one side completely. In the call version shown here, the wider upper wing removes all downside risk — you keep the credit if the market falls — while retaining a defined, capped risk on a moderate rally. It offers a high-probability payoff with no cost on one tail.
Payoff Diagram
Profit & Loss at expiry
Per share (multiply by lot size 75). Gold dots mark breakeven points; green = profit, red = loss.
Construction
- Buy 1 lower-strike Call.
- Sell 2 middle-strike Calls.
- Buy 1 higher-strike Call, placed further out than the lower wing (the 'broken' wing).
- The skew usually produces a net credit and removes risk on the near side.
When to Use It
Use when you expect the market to stay near or below the middle strike and want a defined-risk income trade with no loss if you are wrong on the downside. Best when you can enter for a credit and IV is reasonable.
The Greeks
Positive Theta near the middle strike, Negative Vega, defined Gamma.
Risks & Considerations
- Retained, capped loss on the side of the wider wing.
- Four legs mean higher transaction costs.
- Getting the skew wrong can reintroduce two-sided risk.
Worked Example (Nifty)
Illustrative trade — lot size 75
Nifty 20,000. Buy 19,800 CE ₹280, sell 2× 20,000 CE ₹200, buy 20,500 CE ₹60. Net credit ₹60. Below 19,800 you simply keep ₹60 × 75 = ₹4,500 (no downside risk). Peak profit ₹260 × 75 = ₹19,500 at 20,000. Capped loss on a rally, maximum about ₹18,000 near 20,500. Upper breakeven ≈ 20,260.