Broken Wing Short Put Butterfly – The Option Strategy Desk Reference

Broken Wing Short Put Butterfly

Strategy: Sell n ITM Puts, 14 DTE

Buy 2n ATM Puts, Same Expiry

Sell n OTM Puts, Same Expiry

(Different Width Between Strikes)


Price Chart: Downtrending

Current IV%: 50%

IV Rank: 50

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

Typical Strike Deltas:

Lower Short Puts 0.45 to 0.40

Central Long Puts 0.45 to 0.50

Higher Short 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’s possible to structure this defined-risk butterfly strategy to fit either a bearish or bullish bias by reversing the number of option contracts sold in the wings. The example is bearish. (A bearish bias sells OTM puts that are closer to the ATM strike for less premium than received by selling the ITM options.)

Manage: Recall how both unbalanced and broken wing butterflies increase both profit potential and risk. Close the butterfly for profit as soon as the price drop of the underlying drops to or below $75 on the X axis of the risk profile. If the price experiences a rally rather than a drop, close the trade to recover the premium that remains in the 10 long call options and keep the short $75 put until it can either be closed for profit or expires 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!