What is a Broken Wing Butterfly?

A broken wing butterfly is an uneven butterfly spread. One wing is wider than the other, creating a directional bias.

Structure

  • Buy 1 put: Lower strike (e.g., 24,000)
  • Sell 2 puts: Middle strike (e.g., 24,500)
  • Buy 1 put: Higher strike (e.g., 25,000)

The width between strikes is different on each side.

Example

NIFTY at 24,500. Create broken wing butterfly:

  • Buy 24,000 put for Rs 200
  • Sell 2x 24,500 put for Rs 700 (2 x 350)
  • Buy 25,000 put for Rs 150
  • Net debit: Rs 50

P&L Scenarios

  • NIFTY at 24,500: Max profit Rs 450
  • NIFTY below 24,000: Max loss Rs 50
  • NIFTY above 25,000: Max loss Rs 50

Advantages

  • Low cost: Small net debit
  • Defined risk: Max loss is known
  • Directional bias: Can be tuned for bullish or bearish

When to Use

  • Market outlook: Bullish or bearish with range
  • Volatility: High IV environment
  • Timeframe: 30-45 days to expiry

SEBI Disclaimer

Options trading involves substantial risk of loss. This article is for educational purposes only.

Strike Selection Methodology

A broken wing butterfly is constructed so that one wing is further away than the other, shifting the risk. The setup, expressed for the call side:

  1. Sell the 1:1 body around the expected move, for example selling the 25000 and 25300 Nifty calls against buying 24800 below.
  2. Buy the broken far wing at 25600 giving the spread asymmetry that makes the trade net credit or a low debit.
  3. Select the far wing distance based on two things: the range you are willing to be entirely wrong about, and the margin you want to free versus a condor.

The asymmetry is the entire point: reward concentrates on the near side while the far side caps the theoretical loss at a price you chose in advance.

The Math: Credit, Width and Max Loss

Use a round-number example to internalise the relationship. With Nifty near 25000:

  • Buy 24700 call at 320, sell 25000 call at 140, sell 25100 call at 95, buy 25300 call at 30.
  • Net credit of about 235 minus the far wing cost, leaving a small credit or a near-zero entry.
  • Max reward is the credit collected if the market settles at or below the short strikes.
  • Max loss equals the near-wing width (300 points) minus the collected credit, around 65-70 points per spread here.

The trade works because the call you sold far out (25100/25300 wing) is priced on low probability, while the rare full blowout loses only the difference between the two wings, roughly half of what a standard long butterfly risks.

Margin Efficiency vs the Iron Condor

For a given risk, the broken wing butterfly often ties up noticeably less margin than an iron condor of comparable credit, because the far wing is a real bought option lowering net exposure. In an Indian F&O margin calculator: a 4-lot broken wing round 25000 typically posts 30-40% less margin than the 4-leg condor, freeing capital for a second uncorrelated trade. The cost of that efficiency is a lopsided payoff: the breakeven band is narrow on one side, and the far side requires the market to stay inside a range you picked optimistically.

Early-Protection and Exit Rules

Broken wings reward discipline more than most butterflies. Three rules keep losses small:

  • Exit on the near strike being tested: if price trades through the sold 25000 with volume, the edge is gone; take the defined loss.
  • Take profit at 40-50% of max gain: butterflies compress in theta fast; waiting for full decay rarely wins.
  • Never adjust during the final 2 DTE: gamma in the far week makes closing spreads pricey and unpredictable.

A Bank Nifty Worked Example

Suppose Bank Nifty sits at 52000 at 25 DTE and you expect a slow drift lower but not a crash:

  • Buy 51600 put at 380, sell 52000 put at 240, sell 52100 put at 210, buy 52300 put at 60.
  • You collect a small credit near 10-15 points and risk roughly 285 points to the upside.
  • You win well if price ends under 52000, and your damage is capped if it rallies hard, which is exactly the skewed profile a drifting-down market wants.

Position sizing for such a trade belongs to the far side of the error: size the loss, then back into the credit, not the other way around.