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    Butterfly + Broken Wing Butterfly

    Uploaded by

    Mrityunjay Kumar
    The document compares and contrasts the Iron Condor and Iron Butterfly options strategies. While both require the underlying asset's price to remain in a range, the Iron Condor gives a wider range but lower potential profit. The Iron Butterfly has a narrower effective range but can profit more if the price stays within that range. The document then explains the setup, mechanics, risks and rewards of call and put broken wing butterfly spreads, which combine aspects of credit spreads and butterfly spreads. It notes they are most suitable for experienced traders and should generally be opened for a credit to improve odds of profitability.

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    Butterfly + Broken Wing Butterfly

    Uploaded by

    Mrityunjay Kumar
    263 views4 pages
    The document compares and contrasts the Iron Condor and Iron Butterfly options strategies. While both require the underlying asset's price to remain in a range, the Iron Condor gives a wider range but lower potential profit. The Iron Butterfly has a narrower effective range but can profit more if the price stays within that range. The document then explains the setup, mechanics, risks and rewards of call and put broken wing butterfly spreads, which combine aspects of credit spreads and butterfly spreads. It notes they are most suitable for experienced traders and should generally be opened for a credit to improve odds of profitability.

    Original Title

    BROKEN WING BUTTERFLY

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    The document compares and contrasts the Iron Condor and Iron Butterfly options strategies. While both require the underlying asset's price to remain in a range, the Iron Condor gives a wider range but lower potential profit. The Iron Butterfly has a narrower effective range but can profit more if the price stays within that range. The document then explains the setup, mechanics, risks and rewards of call and put broken wing butterfly spreads, which combine aspects of credit spreads and butterfly spreads. It notes they are most suitable for experienced traders and should generally be opened for a credit to improve odds of profitability.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    263 views4 pages

    Butterfly + Broken Wing Butterfly

    Uploaded by

    Mrityunjay Kumar
    The document compares and contrasts the Iron Condor and Iron Butterfly options strategies. While both require the underlying asset's price to remain in a range, the Iron Condor gives a wider range but lower potential profit. The Iron Butterfly has a narrower effective range but can profit more if the price stays within that range. The document then explains the setup, mechanics, risks and rewards of call and put broken wing butterfly spreads, which combine aspects of credit spreads and butterfly spreads. It notes they are most suitable for experienced traders and should generally be opened for a credit to improve odds of profitability.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    BUTTERFLY + BROKEN WING BUTTERFLY

    What is the difference between Iron Condor and Iron Butterfly?


     Both strategies require that the underlying price stay inside of a range for the trade to be
    profitable. The Iron Condor gives you more room, but the profit potential is usually much less.
    Generally speaking, Iron Condor is a High(er) Probability trade and Iron Butterfly is a Low(er)
    Probability trade.

    1.      Condor spreads are made up of the same class of options, either all call options or all put
    options. The reverse side of condors is the iron condor, which by default consists of both calls
    and puts.

    Call Broken Wing Butterfly


    Market Assumption:
    Similar to a call credit spread, a call broken wing butterfly strategy is a bearish/neutral strategy.
    But with a call credit spread, you don’t care if the price of the underlying falls or stays. With a
    call broken wing butterfly you ideally hope that the price stays right where it is, just like with a
    normal butterfly spread. Nevertheless, it is not that bad if the price moves further down, with
    this strategy you still will make money. So as you can see, a call credit spread is a combination
    of the high probability credit spread strategy and the rather low probability butterfly strategy.
    This broken wing butterfly spread can be used for high probability trading.
    Setup:
    ·         A) Buy 1 (ITM/ATM) Call
    ·         B) Sell 2 (ATM/OTM) Call (1 strike above A)
    ·         Skip one Strike
    ·         C) Buy 1 (OTM) Call (2 strikes above B)
    This should result in a credit (You get paid to open), but depending on how far ITM/ATM/OTM
    you place it, it can result in a debit (pay to open).
    Profit and Loss:
    As clearly recognizable on the payoff diagram, a call broken wing butterfly is both a defined risk
    and a defined profit strategy. The maximum achievable profit is usually higher than the
    maximum loss. But this profit is rarely realized because to achieve it, the price of the underlying
    has to be exactly at the short strike. This rarely happens. Nevertheless, due to the long call, this
    strategy will still be profitable, if the price moves further down. Max loss is realized, if the price
    of the underlying is above the higher OTM long call.
    Maximum Profit: Strike of Short Call – Strike of lower Long Call (Width of closer Strikes) (*100)
    + Premium received – Commissions
    If paid to open (debit): Strike of Short Call – Strike of lower Long Call (Width of closer Strikes)
    (*100) – Premium paid – Commissions
    Ex. (Strike 100, 101 and 103) => 1$ Width * 100 + 20$ Premium – 3$ Commissions = 117$ (max
    profit)
    Maximum Loss: Strike of higher Long Call – Strike of skipped Strike (Width of Strikes) (*100) –
    Premium received + Commissions
    If paid to open (debit): Strike of higher Long Call – Strike of skipped Strike (Width of Strikes)
    (*100) – Premium paid + Commissions
    Ex. (Strike 100, 101, and 103) => (103$ -102$) * 100 – 20$ Premium + 3$ Commissions = 83$
    (a normal option contract controls 100 shares, therefore *100)
    Implied Volatility and Time Decay:
    Time Decay or the option Greek Theta is positive and works in the favor of a call broken wing
    butterfly. If everything goes as planned, the sold options will lose their value over time and
    eventually expire worthless. The amount of time decay increases, the closer you get to
    expiration.
    This strategy usually profits from a drop in implied volatility (IV) and should therefore ideally be
    entered in times of high implied volatility (IV rank over 50). Doing this will increase the
    premium taken in.
    Put Broken Wing Butterfly
    Market Assumption:
    The market assumption for a put broken wing butterfly should be sort of the opposite to the
    one of a call broken wing butterfly. First priority should again be that the underlying price stays
    more or less where it already is. But if it moves higher, you can still make some money.
    Summed up, a put broken wing butterfly is a bullish/neutral strategy. Due to the fact that the
    price of the underlying has to move before you lose money, this is a suitable strategy for high
    probability trading.
    Setup:
    ·         A) Buy 1 (ITM/ATM) Put
    ·         B) Sell 2 (ATM/OTM) Put (1 strike below A)
    ·         Skip one Strike
    ·         C) Buy 1 (OTM) Put (2 strikes below B)
    This should result in a credit (You get paid to open), but depending on how far ITM/ATM/OTM
    you place it, it can result in a debit (pay to open).
    Profit and Loss:
    Just as seen on the payoff diagram above, a put broken wing butterfly is both a defined risk and
    a defined profit strategy. This means that you can’t lose more than a set amount of money. The
    maximum profit is normally bigger than the maximum draw down. Nevertheless, the max gain
    is rarely achieved, because to achieve it, the price of the underlying has to be exactly at the
    strike price of the short puts. But as long as the price does move further up, you still can make
    some money. Maximum loss is then achieved, when the underlying’s price is below the strike of
    the lower long put.
    Maximum Profit: Strike of higher Long Put – Strike of Short Put (Width of closer Strikes) (*100)
    + Premium received – Commissions
    If paid to open (debit): Strike of higher Long Put – Strike of Short Put (Width of closer Strikes)
    (*100) – Premium paid – Commissions
    Ex. (Strike 100, 99 and 97) => 1$ Width * 100 + 20$ Premium – 3$ Commissions = 117$ (max
    profit)
    Maximum Loss: Strike of skipped Strike – Strike of lower Long Put (Width of Strikes) (*100) –
    Premium received + Commissions
    If paid to open (debit): Strike of skipped Strike – Strike of lower Long Put (Width of Strikes)
    (*100) + Premium paid + Commissions
    Ex. (Strike 100, 99, and 97) => (98$ -97$) * 100 – 20$ Premium + 3$ Commissions = 83$
    (a normal option contract controls 100 shares, therefore *100)
     
     
    Implied Volatility and Time Decay:
    Time Decay or the option Greek Theta is positive and works in the favor of a put broken wing
    butterfly. If everything goes as planned, the sold options will lose their value over time and
    eventually expire worthless. The amount of time decay increases, the closer you get to
    expiration.
    This strategy usually profits from a drop in implied volatility (IV) and should therefore ideally be
    entered in times of high implied volatility (IV rank over 50). Doing this will increase the
    premium taken in.

    Trader’s Note:
    I personally think that the broken wing butterfly spread is a superb option strategy, which can be very
    profitable if used correctly. Nevertheless, I do not think that this kind of strategy is for everybody. As you
    may have noticed in my breakdown of it, the broken wing butterfly option strategy is a very advanced
    strategy and should therefore also be used by more advanced traders. I do not recommend that any
    beginner (option) traders use this strategy. For beginners, I would much rather recommend the far
    simpler credit spread strategy (Learn more about credit spreads here), credit spreads are very simple
    and work similarly to broken wing butterflies.
    Additionally, no matter how advanced you are in trading, if you plan on trading any broken wing
    butterflies, I recommend only opening them for a credit. If you can’t open your broken wing butterfly for
    a credit, I suggest either moving the strikes or just moving on to another setup. Opening broken wing
    butterflies for a credit, will lead to a higher potential profit and an eventual higher probability of success.

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