A Broken Wing Butterfly is an options strategy designed to generate profit within a specific price range, characterized by an unequal distance between its strike prices, which adjusts its risk-reward profile. Unlike a standard butterfly spread, the “broken wing” configuration skews the potential profit and loss to favor one side, either reducing the maximum loss on one side or enhancing profit potential, depending on the desired market directional bias. This setup is common in institutional options trading for managing risk around anticipated price stability or moderate movement.
Mechanism
This strategy typically involves four options contracts of the same type (calls or puts) and expiration, but with three different strike prices. It combines a bull or bear spread with an additional option at a wider, unequal strike to create an asymmetric payoff structure. For example, a broken wing call butterfly might involve buying one in-the-money call, selling two at-the-money calls, and buying one out-of-the-money call, where the distance between the higher strike calls is greater than the distance between the lower strike calls, or vice-versa. This structural imbalance defines its risk profile.
Methodology
Traders employ the Broken Wing Butterfly to express a nuanced view on an underlying digital asset’s price, often expecting limited movement but with a preference for a slight upward or downward drift, while seeking to limit risk if the price moves significantly in an unfavorable direction. This strategy can be structured as a net credit or net debit trade, with the asymmetric wings enabling adjustment of risk parameters to reduce capital outlay or cap downside exposure. It is a refined tactical tool within smart trading systems and institutional options RFQ processes, allowing for tailored exposure to volatility and price range expectations.
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