Skip-Strike Butterfly
A butterfly spread with a gap between strikes. Creates a directional bias while maintaining a butterfly-like payoff structure.
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What is a Skip-Strike Butterfly?
A skip-strike butterfly (also called a broken-wing butterfly or unbalanced butterfly) is a butterfly spread where the strikes are not evenly spaced. You "skip" a strike on one side, making one wing wider than the other. This creates a directional bias — the trade is not centered on the current stock price.
In a regular butterfly, the strikes might be 95/100/105 — perfectly balanced. In a skip-strike, they might be 95/100/110 — the upper wing is wider. This shifts the profit zone and changes the risk profile. You can often enter the trade for a very small debit or even a credit because the wider wing's short option is further from the money.
The result is a trade that looks like a butterfly but has directional characteristics. You are combining a neutral outlook with a mild directional lean.
How to Set It Up
- Buy 1 option at the lowest strike (A)
- Sell 2 options at the middle strike (B)
- Buy 1 option at the highest strike (C), but skip a strike to make one wing wider
- All same expiration
- Using calls for bullish bias: Skip-strike on the upper side (wider upper wing). Example: 95/100/110 using calls.
- Using puts for bearish bias: Skip-strike on the lower side (wider lower wing). Example: 90/100/105 using puts.
- Expiration: 30-45 days.
- Net cost: Varies. The wider wing can create a credit entry, which means no risk on the wider side.
The skip creates asymmetric risk. On the narrow wing side, the risk is defined. On the wider wing side, the risk can be larger or even eliminated (if entered for a credit).
When to Use This Strategy
Use a skip-strike butterfly when:
- You have a mild directional bias combined with a neutral outlook
- You want a butterfly that can be entered for a credit
- You want to eliminate risk on one side of the trade
- You want a creative way to express a range-bound thesis with a safety net
- You are already familiar with standard butterflies and want to fine-tune the risk
Skip-strike butterflies are popular with experienced options traders who like to tailor their risk precisely. They are essentially a more flexible version of the standard butterfly.
Example Trade
Stock XYZ is trading at $100. You are slightly bullish and think it will settle near $105.
Using calls with a bullish skip-strike:
- Buy 1 XYZ $100 call for $4.50
- Sell 2 XYZ $105 calls for $2.50 each ($5.00 total)
- Buy 1 XYZ $115 call for $0.80
- Net debit: $4.50 + $0.80 - $5.00 = $0.30 ($30 total)
If XYZ finishes at $105: The $100 call is worth $5. The two $105 calls expire worthless. The $115 call expires worthless. Profit: $5 - $0.30 = $470. Max profit.
If XYZ stays at $100: All calls worthless. Loss: $30. Tiny risk on the downside.
If XYZ rallies to $115: The $100 call is worth $15, the two $105 calls cost $10 each ($20 total), the $115 call is worthless. Net: $15 - $20 + $0 = -$5. Loss: $5 + $0.30 = $530. The wider wing creates risk on the upside.
If XYZ rallies past $115: The long $115 call starts offsetting losses. Max loss on the wide wing is (wider width - narrower width) adjusted for the debit.
Risk and Reward
- Max profit: (Narrower wing width - net debit) x 100. ($5 - $0.30) x 100 = $470. At the middle strike.
- Max loss: On the narrow side, just the net debit ($30). On the wider side, (wider wing width - narrower wing width + net debit) x 100, which can be larger.
- Breakeven: Varies based on the specific strikes. Lower breakeven: lower strike + net debit. Upper breakeven: depends on wing widths.
The key advantage is the asymmetric risk — very little downside risk with strong profit potential at the target.
Tips and Common Mistakes
- Understand which side has more risk. The wider wing has more risk. Make sure the wider wing is on the side you think the stock will NOT go.
- Aim for a credit entry. If you can enter for a credit, you eliminate risk on the narrow side entirely.
- This is a broken-wing butterfly by another name. You may see it referred to as BWB in some platforms.
- Pin risk at expiration is real. If the stock is near the short strikes at expiration, manage the position before close.
- Start with regular butterflies. If you are new to butterflies, master the standard version before moving to skip-strike.
Related Strategies
- Long Call Butterfly — standard balanced butterfly
- Broken Wing Butterfly (Call) — same concept, different name
- Broken Wing Butterfly (Put) — the put-based version
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