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Broken Wing Butterfly

The broken wing butterfly is the 0-DTE trader's best friend: credit on one side, pin upside in the middle, defined risk if you're wrong.

A regular butterfly spread is symmetric: equal-width wings on both sides. A broken wing butterfly (BWB) skips a strike on one side, making one wing wider than the other. The wider wing costs less to buy, so you collect a credit on that side. The result: no risk in one direction, defined risk in the other, and max profit if the underlying pins at the center strike.

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A broken wing butterfly is a regular butterfly with one wing stretched. The stretch creates a credit on one side (you can't lose if the market moves that way) but larger risk on the other. It's an asymmetric bet on a pin, funded by accepting directional risk you're comfortable with.

What You Do (Put BWB, skip downside)​

The SetupYou receive premium
Buy1 put at upper strike (K3)
Sell2 puts at middle strike (K2)
Buy1 put at lower strike (K1), wider gap below
Max Profit
At K2 (center)
Upside Risk
None (credit collected)
Downside Risk
Below K1 (defined)
Cost
Small credit or zero

Worked Example​

BTC at 94,800. You think it settles around 92k by end of day. You don't want to pay for the bet.

Buy 1x 95k put for 2,850. Sell 2x 92k puts for 1,580 each. Buy 1x 85k put for 380.

Upper wing: 3k wide (95k to 92k). Lower wing: 7k wide (92k to 85k). The skip is on the downside.

Net credit: (2 x 1,580) - 2,850 - 380 = -70 (small debit). Let's adjust: in a slightly higher IV environment, the short puts yield more.

Revised (IV at 72%): Buy 1x 95k put for 2,850. Sell 2x 92k puts for 1,680 each. Buy 1x 85k put for 310.

Net credit: (2 x 1,680) - 2,850 - 310 = 200.

BTC at Expiry
P&L
What Happens
$98,000
+$200
All puts expire worthless. Keep credit.
$95,000
+$200
Still above the upper strike. Keep credit.
$93,500
+$1,700
Upper put ITM. Short puts still OTM. Climbing toward max profit.
$92,000
+$3,200
Pin! Max profit. Upper put worth \$3k, shorts are ATM.
$89,000
+$200
Below center. Profit declining. Short puts eating gains.
$85,000
-$3,800
At the wide wing. Max loss zone.
$80,000
-$3,800
Below K1. All puts deep ITM, but the long K1 put limits further loss.

The 200 credit means you can't lose on any rally. If BTC goes to 200k, you keep 200. If BTC pins at 92k, you make 3,200. If BTC crashes through 85k, you lose 3,800. That's the whole trade. The asymmetry is the product.

How the P&L Works​

  1. Above K3. All puts expire worthless. You keep the credit. Zero risk. This is the "safe" side.
  2. At K2 (center). Max profit. The long put at K3 is worth (K3-K2), the short puts are ATM, the long put at K1 is worthless.
  3. Between K2 and K1. Profit declines, eventually turning into a loss as the short puts go deeper ITM.
  4. Below K1. Max loss. The wider wing means this loss is larger than a symmetric butterfly. But it's defined.
Spot at Expiry$100k
$70k$130k
Net Credit$1k
$0k$3k
BE $94k$0+$6k-$4k$70kK1 $90kK2 $100kK3 $105k$130kSpot Price at ExpiryP&L
Settlement
$100k
P&L
+6.0k
Max Loss
-$4k
Max Gain
+$6k

When to Use​

  • You have a pin target. A specific price where you think the underlying settles
  • 0-DTE or weekly expiry plays where gamma makes the payoff spike razor-sharp
  • You want no risk on one side. If you're wrong in the safe direction, you keep the credit
  • You're comfortable with asymmetric risk on the other side and have a view that a crash through the wide wing is unlikely

Common Mistakes​

Common Mistakes
The mistakeMaking the wide wing too wide to chase a bigger credit. Skipping 3-4 strikes instead of 1-2.
The realityThe wider the skip, the bigger your max loss. A \$3k upper wing with a \$10k lower wing on BTC gives you a \$200 credit but \$6,800 max loss. The risk/reward degrades quickly. Keep the wings within 2-3x of each other.
The mistakeTrading the BWB on 30-day options and wondering why it doesn't behave like the 0-DTE examples.
The realityThe BWB's magic is the pin. On 0-DTE, the payoff spike at the center strike is sharp because gamma is enormous. On 30-day options, the payoff curve is smooth and flat -- there's no spike. The center pin is worth much less. BWBs are a short-dated structure.
The mistakeIgnoring the max loss because 'BTC won't drop 10% in a day.'
The realityBTC drops 10% in a day more often than you think. March 2024, April 2024, August 2024. If your wide wing is \$7k below center and BTC is already weak, a cascade liquidation event puts you at max loss in hours. Size the position so max loss doesn't ruin your week.

Greeks at a Glance​

Greek
Sign
Plain English
Delta
+/-
Slightly directional, skewed toward the narrow wing side. Near center, roughly neutral.
Gamma
+/-
Positive near center, negative at wide wing. On 0-DTE, gamma is extreme at the center strike.
Theta
+
Positive near center. The two short options decay faster than the two longs. Time is your friend if you're near the pin.
Vega
-
Benefits from IV declining. A tighter distribution pushes probability toward the pin.

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