Broken Wing Butterfly (Puts)
A put butterfly with unequal wings. Eliminates upside risk and skews the payoff with a slight bearish bias.
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What is a Broken Wing Butterfly (Puts)?
A broken wing butterfly with puts is the put version of the unequal-wing butterfly. You buy one put at a higher strike, sell two puts at a middle strike, and buy one put at a lower strike — but the lower wing is wider than the upper wing. This creates a bearish bias with zero risk if the stock rallies, and defined risk if it drops sharply.
The typical setup enters for a small credit. If the stock goes up, you keep the credit with no risk. If it stays near the middle strike, you collect maximum profit. The only danger is a big drop that blows through the wide lower wing.
How to Set It Up
- Buy 1 put at the upper strike
- Sell 2 puts at the middle strike
- Buy 1 put at a lower strike (further from the middle than the upper strike)
- Same expiration for all legs
- Example spacing: $93/$100/$103 — the lower wing is $7 wide, the upper wing is $3 wide
- Credit entry: The wider lower wing vs. the narrow upper wing typically allows a net credit.
The trade is a skewed butterfly with all the risk concentrated on the downside.
When to Use This Strategy
Use a put broken wing butterfly when:
- You are neutral to slightly bearish
- You want zero risk on the upside
- You want to enter a butterfly-like trade for a credit
- You expect the stock to stay near the middle strike or drift down slightly
- You accept defined downside risk in exchange for free upside
This is a favorite among income traders who want to sell premium with a built-in safety net on one side.
Example Trade
Stock XYZ is trading at $100. You expect it to stay flat or dip slightly.
- Buy 1 XYZ $103 put for $4.80
- Sell 2 XYZ $100 puts for $3.20 each ($6.40 total)
- Buy 1 XYZ $93 put for $1.20
- Net credit: $6.40 - $4.80 - $1.20 = $0.40 ($40 collected)
If XYZ stays above $103: All puts expire worthless. You keep the $40 credit.
If XYZ closes at $100: The $103 put is worth $3, the short puts expire worthless, and the $93 put is worthless. Profit: $300 + $40 = $340.
If XYZ closes at $93: The $103 put is worth $10, the two $100 puts cost you $14, and the $93 put is worthless. Net: $10 - $14 = -$4. Plus credit $0.40 = -$360 loss.
If XYZ closes below $93: Losses cap at max loss. ($7 - $3 - $0.40) x 100 = $360.
Risk and Reward
- Max profit: (Narrow wing width + credit) x 100. $340 at the middle strike.
- Max loss: (Wide wing width - narrow wing width - credit) x 100. $360 on the downside. Zero on the upside.
- Breakeven: Approximately the lower strike plus the net value at that point.
Zero upside risk makes this attractive for neutral-to-bearish traders who do not want any exposure to a rally.
Tips and Common Mistakes
- Watch for big downside moves. Your risk is concentrated entirely below the middle strike.
- Close early if the stock drops sharply toward the wide wing. Do not wait for max loss.
- Enter when IV is high to maximize the credit received.
- This trade benefits from time decay. The two short puts decay faster than the long puts, so time passing helps you.
Related Strategies
- Long Put Butterfly — symmetrical version with equal wings
- Broken Wing Butterfly (Calls) — the call version with bullish bias
- Iron Condor — defined risk on both sides for a neutral outlook
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