🦋 [OptionsPlay] Broken Wing Butterfly: Fluttering into (Credit) Profits through Volatility

Options strategies have some of the strangest names. [LOL]   In this article, I want to shed some light on the use of a lesser-known but versatile Options Play - The Broken-Winged Butterfly (BWB). It sets us up to make bank on tiny stock swings! Its (imo) funky structure lets us ride the bull and bear waves, giving an edge over old-school butterfly spreads. 🦋💰

Uneven wings

Dissecting the Broken Wing Butterfly

The Broken Wing Butterfly (BWB), aka “Skip Strike Butterfly” is a clever options strategy that is net-credit and high-probability trade. Imagine a regular butterfly with one wing shorter than the other - that's a broken wing butterfly in trading terms. It's a strategy where you can still profit, even if your market prediction is off.

Unlike the conventional butterfly spread, which features wings of equal width, the BWB exhibits wings of unequal width. This “uneven wings” quirk lets traders maximize profits while minimizing risks for stocks with Neutral / Slightly Directional bias in high Implied Volatility (IV) environments.

Regular Butterfly vs Broken Wing Butterfly

 Setting up a BWB and an Example

Want the best results? Set up your broken wing butterfly when there's high implied volatility (IV). Look for trades with high IV rank and enter for a credit. This boosts your chance of profit, as you're taking the risk off the table on the out-of-the-money side. And remember, these spreads benefit mostly in markets with declining volatility.

You can use either all calls or all puts. Here's the quick setup:

1️⃣ Sell two calls or puts (i.e. main strike)

2️⃣ Buy a call or put (above the main strike)

3️⃣ Buy another call or put (below the main strike).

Here’s a quick purely hypothetical example. Say we crystal-balled $Royal Caribbean Cruises(RCL)$  to rise to $105? We could consider a BWB spread as follows:

1️⃣ Buy a $120 call in RCL.

2️⃣ Sell two $105 calls in RCL.

3️⃣ Buy a $100 call in RCL.

You'll net a credit of $1.00 at where RCL price is now. If RCL closes at $105 at expiration, we’ll walk away with profit of $6.00. The "broken" side is the spread with the option further from the main strike. For us, that's the 105/120 credit spread. This $15 spread covers the cost of the 100/105 debit spread.

The beauty? By extending the long strike up, you get a credit. This means no downside risk since you pocket the premium upfront. Profit if the spread stays out-of-the-money. Pretty cool! [Cool]  

Hypothetical Example of BWB

Stock Selection for Your BWB Strategy

Avoid stocks with unpredictable price fluctuations; you want something steady. Definitely no meme stocks, or stocks around earning seasons.

Your ideal pick? A low-to-medium volatility stock. With fewer price changes, it's easier for you to anticipate its movements, making your BWB play more profitable.

Wondering how to score that perfect stock? Dive into its historical volatility, stay updated with its current trends, and be on the lookout for news that might shake its price. Tools like trend lines and moving averages can be your allies in this quest.

And remember, the expiration date is crucial. Ensure it gives you ample time for the stock to hit your target price, as it plays a pivotal role in the success of your BWB strategy.

Managing Your BWB Trade

Diving into a Broken Wing Butterfly (BWB) trade? Remember, tweaking your trade can be the secret sauce to boosting gains and guarding against risks. Here's what I've seen traders like you often do:

1. Tweak the position: Depending on the flow of the trade, you might consider adding or trimming some options. This way, you can fine-tune the risk and potential rewards.

2. Shift those strike prices: Feeling the market vibes changing? Adjust the strike prices of your options. It's a flexible way to stay on top of market shifts.

3. Change up the expiration: Sometimes, it might make sense to roll your BWB into a different expiry. This aligns your strategy with where you see the stock heading.

But remember, adjusting your BWB isn't a casual move. It demands attention, a solid grasp of the market, and regular checks on the asset and market trends. Stay alert, and adjust when it feels just right.

Summing up

Diving into the world of the Broken Wing Butterfly (BWB)? It's a nifty options strategy offering flexibility in diverse market situations. Here's what it means for traders like you:

✅ The BWB lets you play with both rising and falling markets, raking in consistent small profits.

✅ Success with the BWB isn't just a fluke; it demands a solid grip on the stock market, a future-focused vision, and the agility to tweak positions for maximum gains while keeping risks at bay.

✅ The BWB is your go-to for credits, not debits. That's a big plus, as it promises a lower risk against potential rewards and needs less buying power than many strategies out there.

✅ Ever heard of the regular butterfly? The BWB beats it with a better Probability of Profit (POP) as you're banking a credit upfront.

✅ Crafting a BWB? It's about mixing and matching with either calls or puts, typically leaning ATM/OTM. Think of it as buying a debit spread and pitching a wider credit spread against it using the same short strike.

✅ The cherry on top? Its design. The BWB's credit spread side is broadened, eliminating risk if it concludes OTM and there's a credit at the beginning.

✅ And the best part? Your potential profit skyrockets with the BWB compared to the regular butterfly, all thanks to the upfront credit. Maximum profits? They're yours if the stock price snugly sits on the short strike at expiry.

Flutter in, but always with an informed approach. Good trading, y'all! [Grin]  


If this article has provided useful and interesting insights, I trust that you will gift a LIKE or a FOLLOW. Much thanks!

@TigerOptions @CaptainTiger @MillionaireTiger @TigerStars @Daily_Discussion @TigerPM 

# How to use options to hedge in a volatile market?

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Report

Comment8

  • Top
  • Latest
  • GriseldaBrown
    ·2023-09-11
    TOP

    Market is manipulating, RCL should be 20 percent lower

    Reply
    Report
    Fold Replies
    • jace0777
      Interesting! What are some reasons that led you to say that? [Smile]
      2023-09-11
      Reply
      Report
  • shining87
    ·2023-09-22

    7 weeks red and the sellers can’t even get it below 95.00. How can you be short? Price action points to 100+

    Reply
    Report
  • XantheJuliana
    ·2023-09-22

    I'll sell my shares to the shorts for $250

    Reply
    Report
  • YaleBrewster
    ·2023-09-22

    Long term debt/equity (TTM) 658.21% this is crazy while interest rates are rising ...

    Reply
    Report
  • YvetteGunther
    ·2023-09-22

    This will be at $80 real quick.

    Reply
    Report
  • YorkTurner
    ·2023-09-22

    We are ready to take out recent 52 weeks high very soon

    Reply
    Report
  • YeddaJohnson
    ·2023-09-22

    Buy the dip while it still here

    Reply
    Report