BROKEN WING BUTTERFLY MAX PROFIT

The typical broken wing butterfly spread profits when:

• Stock price stays the same, IV decreases
• Stock price goes up or down, but not past the credit spread strikes
• Time passes and IV decreases
• Stock price moves toward the short strikes

In other words, broken wing butterflies require time and volatility contraction to make money. You’ll need to keep this in mind to achieve the maximum profit.

How is max profit calculated?

Like this:

• Width of narrower debit spread + credit received

Or like this:

• Width of narrower debit spread - debit paid
  

BROKEN WING BUTTERFLY MAX LOSS

A broken wing butterfly will show losses at expiration when:

• Stock is below the short puts by more than credit received plus the width of the put spread
• Stock is above short calls by more than credit received plus width of call spread
• Loss is capped at the furthest OTM long option

How max loss is calculated in a long symmetrical butterfly spread:

• Debit paid + commissions (if the spread is completely ITM or OTM)

Max loss calculation for broken wing butterfly spreads is one of either

• Width of credit spread - width of narrow debit spread - credit received

Or:

• Width of credit spread - width of narrow debit spread + debit paid
  

BREAKEVENS – CALL BROKEN WING BUTTERFLY

A broken wing butterfly will show losses at expiration when:

• Stock is below the short puts by more than credit received plus the width of the put spread
• Stock is above short calls by more than credit received plus width of call spread
• Loss is capped at the furthest OTM long option

How max loss is calculated in a long symmetrical butterfly spread:

• Debit paid + commissions (if the spread is completely ITM or OTM)

Max loss calculation for broken wing butterfly spreads is one of either

• Width of credit spread - width of narrow debit spread - credit received

Or:

• Width of credit spread - width of narrow debit spread + debit paid
  

BREAKEVENS – CALL BROKEN WING BUTTERFLY

A broken wing butterfly will show losses at expiration when:

• Stock is below the short puts by more than credit received plus the width of the put spread
• Stock is above short calls by more than credit received plus width of call spread
• Loss is capped at the furthest OTM long option

How max loss is calculated in a long symmetrical butterfly spread:

• Debit paid + commissions (if the spread is completely ITM or OTM)

Max loss calculation for broken wing butterfly spreads is one of either

• Width of credit spread - width of narrow debit spread - credit received

Or:

• Width of credit spread - width of narrow debit spread + debit paid
  

BROKEN WING BUTTERFLY

• Setup: calls if you want your max profit and risk to be to the upside, or puts if you want your max profit and risk to be to the downside
• Trade is comprised of two short options and two long options (one above and one below the short strike)
• Risk is defined
• Max profit is the width of the debit spread portion of the trade, less the debit paid, or plus the credit received on trade entry. To reach max profit the stock must pin your short strike at expiration.
• Max loss is the width of the credit spread, minus the width of the debit spread, minus the credit received upfront (or plus the debit paid upfront)
• Ideal environment for this strategy: high IV
  

CREDIT SPREAD

• Setup: either calls when market assumption is bearish or puts when market assumption is bullish
• Trade is set up with a long and a short option contract at different strikes, with the short option trading at a higher premium than the long option
• Risk is defined
• Max profit is the credit you receive for selling the spread up front– you can't make any more money than the initial credit received. To reach max profit the spread just needs to expire OTM.
• Max loss is the width of credit the spread minus the credit received upfront
• Ideal environment for this strategy: high IV