← Strategy LabLesson 36 · 4:58
Broken-wing butterfly
Summary
The broken-wing butterfly is a butterfly with uneven wings: here a put butterfly with the upper wing $5 from the middle and the lower wing $15 away. In the example it pays $19 to open, makes up to $519 if XYZ ends at $100, has no loss at all if XYZ rises past $105, but can lose $981 if XYZ falls below $85. You break even at $94.81, on the downside only.
Key terms
- broken-wing butterfly
- A butterfly with uneven wings, so one side has no loss and the wider side carries the bigger risk.
- uneven wings
- Wings set at different distances from the middle strike, here $5 above and $15 below.
- net credit
- When a pair of trades brings cash in overall.
- wide wing
- early assignment
- Being assigned before the end date, which can happen on any day with American-style options.
Check yourself
Answer each question to see why the right answer is right.
1. How much comes in, net, when you open the lesson's broken-wing butterfly?
2. XYZ ends at $110 on the last day. What is your result?
3. XYZ ends at $90 on the last day. What is your result?
4. Why is the most you can lose $981?
5. XYZ sits at $90 and the days pass with nothing else changing. What does time do to your result?
Finished the video and the quiz? .