Broken Wing Butterfly Explained: No Upside Risk, Paid to Open
The broken wing butterfly explained step by step: one put spread wider than the other, opened for a net credit, so there is no risk above the upper strike. A worked XYZ example ($100) with max profit $540, breakeven $89.60, max loss $460 and three expiration scenarios.
A broken wing butterfly is a butterfly in which one wing is wider than the other. Skipping a strike on one side lets you open the trade for a credit, so the risk on that side disappears and all of it moves to the side you consider less likely.
1. The regular butterfly
Buy 1 put at 100, sell 2 puts at 95, buy 1 put at 90: two wings of 5 points each. Profit peaks at 95, but the position is usually opened for a debit, with a small risk on both sides.
2. Breaking the wing
Move the lower long put from 90 to 85, skipping a strike: 100 / 95 / 85. The wider wing turns the debit into a credit and removes the risk above 100. The risk now sits on one side only, the downside. The same structure works with calls, mirrored.
3. Worked example: XYZ at $100
| Leg | Price |
|---|---|
| Buy 1 × 100 put (upper wing) | −$3.60 |
| Sell 2 × 95 puts (body, the target) | +$4.60 (2 × $2.30) |
| Buy 1 × 85 put (broken wing, 90 skipped) | −$0.60 |
| Net credit | +$0.40 per share = $40 per contract |
Narrow wing: 100 → 95 = 5 points. Wide wing: 95 → 85 = 10 points.
4. Max profit, max loss, breakeven
- Max profit: $540, with the stock exactly at 95 at expiration (narrow wing + credit: 5.00 + 0.40).
- Above 100: +$40, all puts expire worthless and you keep the credit. No upside risk.
- Breakeven: $89.60 (short strike − max profit: 95 − 5.40).
- Max loss: $460, with the stock below 85 ((10 − 5 − 0.40) × 100).
5. Three outcomes at expiration
- A — XYZ rises to $103: all puts expire worthless; you keep the $40 credit.
- B — XYZ lands at $95: the long 100 put is worth $5, the short puts expire: 5.00 + 0.40 = +$540.
- C — XYZ drops to $80: everything is in the money; the 85 put caps the loss at −$460.
Up: fine. Gentle drift down: the best case. A crash: the risk agreed at the start.
6. When it makes sense
- Outlook: neutral, or a mild drift lower; no crash expected.
- Volatility: high implied volatility makes it easier to open for a credit.
Checklist: buy 1 put near the price, sell 2 puts at your target, buy 1 more put further down, skipping a strike, and check that the total is a credit.
7. Managing the trade
- Don't be greedy: full profit needs a perfect landing at 95. Take a solid portion when it is there.
- Watch the downside: if the price breaks through 95 toward the wide wing, close or roll the position.
Pros and cons
| Pros | Cons |
|---|---|
| No upside risk (opened for a credit) | Max profit is hard to capture |
| Paid up front | More downside risk than a regular butterfly |
| Large profit zone around the target | Four legs, more commissions |
| Max loss is defined | Needs experience to manage |
In four lines
- A butterfly where one wing is wider than the other.
- Opened for a credit, so there is no risk on one side.
- Max profit = narrow wing + credit.
- Max loss = wide wing − narrow wing − credit.
Educational content, not personalised investment advice. Options carry significant risk and are not suitable for all investors; you can lose more than the credit received. Prices in the example are illustrative.
Every trade on our own account is published after it closes, losses first: Our trades.