Broken Wing Long Put Butterfly

Strategy: Buy n ITM Puts, ≤ 14 DTE

Sell 2n ATM Puts, Same Expiry

Buy n OTM Puts, Same Expiry

(Different Width Between Strikes)

Example:

Price Chart: Uptrending

Current IV%: ≈ 50%

IV Rank: ≈ 50

Trade: Buy x ITM put options; sell x + y ATM put options; buy y OTM put options, different strike widths

Typical Strike Deltas:

Lower Long Puts ≈ −0.45 to −0.47

Central Short Puts ≈ 0.48 to 0.50

Higher Long Puts ≈ −0.50 to −0.55

NOTE: Long butterflies that include long wing options and short body options are more popular than short butterfly options. Short call and put butterflies are included for comparison purposes. (See the long call butterfly’s note and table for more information.)

Goals: It is possible to structure this defined-risk bullish butterfly strategy to fit either a bearish or bullish bias. As seen on the risk profile, the example is bullish. (A bearish bias buys more ITM puts above than OTM puts below, which changes the risk graph accordingly.)

Manage: Close the butterfly for profit if the price of the underlying rallies above $79.50 to $80. If the price experiences a drop rather than a rally, sell the long puts and keep the short puts. The short puts can either be closed for a profit or left to expire worthless.

Profit: Close when this trade returns a profit of 15 to 20 percent.

Loss: This trade experiences a limited loss that rarely exceeds 25 ­percent when properly configured. DO NOT PERMIT OPTIONS TO ­EXPIRE ITM!