The Broken Wing Butterfly: A Deep Dive for Beginners

You've seen this one already in disguise — it's the shape from those two real MDB charts earlier. Now let's slow down and go through it properly: what it is, why traders like it, several full examples, and how to actually put one on.

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1. What Makes It "Broken"

A regular butterfly has two equal-width "wings" — the distance between the lower strike and the middle strike is the same as the distance between the middle strike and the upper strike. That symmetry means you take on roughly equal risk if the stock crashes or if it rallies.

A broken wing butterfly (BWB) breaks that symmetry on purpose. You make one wing wider than the other. The result:

• No risk (or much smaller risk) on the wide-wing side
• All the risk concentrated on the narrow-wing side
• Often built for a much smaller cost than a regular butterfly — sometimes even a net credit (meaning you get paid to put the trade on)

You're essentially saying: "I don't think the stock will move much, but if I'm wrong, I only want to be wrong in one specific direction."

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2. Example 1: Call Broken Wing Butterfly (Upside Protected)

Setup: Stock XYZ trades at $100. You think it'll drift up slightly or stay flat — you're not worried about a big rally, but you want some cushion if it drops.

• Buy 1 call at $100 for $5.00
• Sell 2 calls at $105 for $3.00 each ($6.00 collected)
• Buy 1 call at $115 (wide wing — 10 points instead of the usual 5) for $0.50

Net cost: $5.00 − $6.00 + $0.50 = −$0.50, meaning you actually collect $0.50 to put this trade on.

Stock at expiration	Result
$90 (drops hard)	All calls worthless → Keep the $0.50 credit — small profit even though you were "wrong"
$100	Still worthless → Keep $0.50
$105	$100 call worth $5, others worthless → Profit: $5.00 + $0.50 = $5.50 (max profit)
$115	$100 call worth $15, two $105 calls cost $20 to close, $115 call worthless → Loss builds here
$125	Everything cancels → still only a capped loss, not unlimited

The key feature: because you collected a credit, there's no loss scenario on the downside at all — dropping to zero still leaves you with a small profit. The only place you can lose money is if the stock rallies hard between $105 and $115, and even then, the loss is capped.

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3. Example 2: Put Broken Wing Butterfly (Downside Protected)

Setup: Stock ABC trades at $50. You think it might drift down a little or stay flat, but you're specifically worried about a sharp drop and want that risk removed.

• Buy 1 put at $50 for $4.00
• Sell 2 puts at $45 for $2.00 each ($4.00 collected)
• Buy 1 put at $30 (wide wing — 15 points instead of 5) for $0.30

Net cost: $4.00 − $4.00 + $0.30 = $0.30 debit

Stock at expiration	Result
$60 (rallies)	All puts worthless → Lose the small $0.30 debit
$50	Worthless → Lose $0.30
$45	$50 put worth $5 → Profit: $5.00 − $0.30 = $4.70 (max profit)
$30	Loss builds, but capped
$10 (crashes hard)	Still just a capped loss — the wide lower wing protects you from unlimited downside pain

The key feature: if the stock crashes far below your strikes, your loss stops growing once it passes the wide wing — you don't keep losing money the way you would with a naked put or a regular short position.

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4. Example 3: A Real-World-Style Earnings Setup

Setup: Stock TECH trades at $80, two days before earnings. You think TECH will likely pop on good news (based on recent trends) but want protection in case it drops instead.

• Buy 1 call at $80 for $6.00
• Sell 2 calls at $85 for $4.00 each ($8.00 collected)
• Buy 1 call at $100 (wide wing) for $0.75

Net cost: $6.00 − $8.00 + $0.75 = −$1.25 (you collect $1.25 upfront)

If TECH drops on bad earnings, all the calls expire worthless, but you keep the $1.25 credit — a small win even on a "wrong" guess. If TECH pops modestly to $85, you hit max profit. If TECH absolutely explodes higher (say, to $110), you don't lose unlimited money — the wide $100 wing caps your risk, even though you gave back most of the profit.

This is a common way traders use broken wing butterflies around earnings: get some built-in downside protection while still capturing upside if the stock behaves the way you expect.

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5. Why Not Just Use a Regular Butterfly?

	Regular Butterfly	Broken Wing Butterfly
Risk shape	Small, equal loss on both sides	No loss (or capped loss) on one side, concentrated risk on the other
Cost	Usually a small debit	Often a smaller debit, sometimes a net credit
Best for	No directional opinion, pure "it'll stay still" bet	You have a mild directional lean but still want a defined-risk, flat-ish trade
Downside	Loses on strong moves in either direction	Fully exposed if the stock moves against the "protected" side by a lot within your risk zone

The broken wing butterfly costs you flexibility — you're picking a side to protect, which means you need at least a slight opinion on direction. If you truly have no directional view, a regular butterfly or iron butterfly is more "pure."

In this video, Invest with Henry breaks down how to construct, trade, and manage a Long Iron Butterfly options strategy. The strategy is tailored for traders with smaller account sizes who want high reward-to-risk ratios without tying up significant capital.

Core Concept & Setup

• Capital Efficiency: Designed for accounts under $1,000, allowing traders to risk small amounts (often $40–$90) for potential returns of 4x to 6x on risk [00:00 Opens in a new window ], [03:58 Opens in a new window ].
  
  
• 3-Legged Structure (using Calls or Puts): Set up by selling two short options at the targeted price target (the peak of the butterfly) and buying one option above and one option below that strike as wings/hedges [01:31 Opens in a new window ], [02:01 Opens in a new window ], [03:38 Opens in a new window ].
  
  
• Targeting Expirations: Prefers short-dated contracts, typically 8 days out to short-term weekly expirations [01:13 Opens in a new window ].
  
  

Examples Covered

• Bearish / Post-Earnings Example (Tesla - TSLA): Demonstrates setting up a call-based butterfly around $167.50 following a post-earnings drop, risking $68 to aim for up to $432 in max profit [00:38 Opens in a new window ], [03:58 Opens in a new window ].
  
  
• Bearish Put Example (Apple - AAPL): Shows a tighter put-based butterfly set up at a $165 strike, risking $39 for a potential $211 return [06:34 Opens in a new window ], [07:44 Opens in a new window ].
  
  
• Bullish Put Example (Apple - AAPL): Demonstrates shifting the peak strike up to $172.50 for a bullish outlook, adjusting wing widths to balance break-even probabilities against max payoff [11:15 Opens in a new window ], [13:03 Opens in a new window ].
  
  

Pros & Cons

• Pros:
  
  
  • Ultra-low capital requirement per trade [00:29 Opens in a new window ].
    
    
  • High leverage and potential percentage returns (up to 5x–6x) [04:05 Opens in a new window ], [07:47 Opens in a new window ].
    
    
  • Defined, limited max risk [03:58 Opens in a new window ].
    
    
• Cons:
  
  
  • Multi-leg complexity makes execution and closing harder due to bid-ask spreads and slippage [05:24 Opens in a new window ], [05:34 Opens in a new window ].
    
    
  • Narrow profit zone near the central strike, making maximum profit difficult to hit at expiration [04:59 Opens in a new window ], [09:55 Opens in a new window ].
    
    
  • Considered a higher-risk speculative setup compared to standard income strategies [02:24 Opens in a new window ], [08:03 Opens in a new window ].
    
    

Trade Management Advice

• Take Profits Early: Recommends locking in 50% to 100% gains early if the stock moves favorably intraday rather than holding to expiration [10:48 Opens in a new window ].
  
  
• Position Sizing: Recommends allocating no more than 1% to 5% of a overall portfolio to speculative butterfly setups [09:14 Opens in a new window ].