Broken Wing Butterfly: Skewing the Butterfly to Remove Risk on One Side

A broken wing butterfly is what you get when you take a plain options butterfly and deliberately make one wing wider than the other. That one change does something useful. If you set it up for a small credit, one side of the trade carries no risk at all, and the risk you keep sits only on the side you skewed. It is a favourite of traders who have a mild view, want the trade to pay if the market drifts towards a level, and do not want to lose money if it runs the other way.

We will build one from scratch on a Nifty-style example, work out every number at expiry, and then look at where it goes wrong, because it does go wrong, usually in one specific way.

First, the Ordinary Butterfly

You cannot understand the broken version without the normal one. The Options Industry Council (OIC) describes a long call butterfly as two short calls at a middle strike plus one long call each at a lower and an upper strike. The upper and lower strikes, the wings, have to be the same distance from the middle strike, the body, and every leg shares one expiry.

Per OIC, the best outcome comes when the underlying finishes right at the body on expiry day. The maximum gain is the gap between a wing and the body minus the premium you paid. The maximum loss is the premium paid, and you take it if price ends outside either wing. Small cost, small loss, a narrow zone where it pays well. If you have read our breakdown of the iron butterfly strategy on Nifty, the shape will look familiar.

The catch with a symmetric butterfly is that you are paying a debit, so you lose that debit whichever way the market escapes. A broken wing butterfly asks a simple question: what if we only accepted risk on one side?

How the Broken Wing Butterfly Is Built

tastylive’s explainer on the broken wing butterfly defines it as a long butterfly whose long strikes are not equidistant from the short strike. One wing sits close to the body. The other is pushed further out. That further wing is the “broken” one.

Their framing is the cleanest way to think about it. A broken wing butterfly is just a debit spread and a credit spread that share the same short strike, where the credit spread is wider. The wider credit spread brings in enough premium to pay for the narrow debit spread. If the whole thing is opened for a net credit, there is no loss on the side away from the broken wing: if every option expires worthless, you simply keep the credit.

The legs, using all puts or all calls, are:

• Buy one option on the near side of the short strike (the narrow wing).
• Sell two options at the short strike (the body).
• Buy one option further out on the other side (the broken wing).

Use puts and the risk sits below the market, with the risk-free side above. Use calls and it is the opposite. So the choice of puts or calls is really a choice about which direction you are willing to be wrong in.

A broken wing butterfly does not remove risk. It moves all of it to one side of the market, and you get to choose which side.

A Worked Example With Nifty Puts

All the numbers below are hypothetical, picked to keep the arithmetic clean. They are not live quotes. Real premiums depend on the day, the expiry and implied volatility, so pull up the option chain before you try anything like this.

Say Nifty is at 25,000 and our view is mildly bearish. We think it can slip towards 24,800 by expiry, we do not expect a crash, and we do not want to lose money if it rallies instead. We use puts:

• Buy one 25,000 put at ₹180
• Sell two 24,800 puts at ₹110 each, collecting ₹220
• Buy one 24,400 put at ₹30

We pay ₹180 + ₹30 = ₹210 and receive ₹220, so the position opens for a net credit of ₹10 per unit. Look at the widths. The debit spread (25,000/24,800) is 200 points wide. The credit spread (24,800/24,400) is 400 points wide. That extra width on the lower side is what makes this a broken wing, and it is what pays for the trade.

All figures here are per unit of the index. To get rupee amounts for an actual contract, multiply by the lot size the exchange sets for the contract you trade.

Payoff at expiry, scenario by scenario

Nifty above 25,000. Every put expires worthless. We keep the ₹10 credit. Small, but positive, and this is the whole point of the structure: a rally does not hurt us.

Nifty at exactly 24,800. The 25,000 put is worth 200 points. The two short 24,800 puts and the 24,400 put expire worthless. Profit is 200 + 10 = ₹210 per unit. This is the best case. It matches tastylive’s formula for maximum profit on a credit broken wing butterfly: width of the narrower debit spread plus the credit received.

Nifty at 24,700. The 25,000 put is worth 300. The two short 24,800 puts cost us 100 each, so minus 200. The 24,400 put is worthless. Net is 300 − 200 + 10 = ₹110 per unit. Still comfortably in profit.

Nifty at 24,590. The 25,000 put is worth 410. The short puts cost 210 each, minus 420. Net is 410 − 420 + 10 = zero. This is the breakeven. tastylive gives the downside breakeven for a credit put broken wing butterfly as short strike minus the width of the narrower debit spread minus the credit: 24,800 − 200 − 10 = 24,590. Same answer.

Nifty at or below 24,400. At 24,400 the 25,000 put is worth 600 and the two short puts cost 400 each, minus 800. The 24,400 put is worthless. Net is 600 − 800 + 10 = −₹190 per unit. Below 24,400 the long 24,400 put starts gaining point for point, so the loss stays stuck at ₹190. Using tastylive’s max-loss formula: width of credit spread minus width of debit spread minus credit, or 400 − 200 − 10 = 190.

So the profile reads like this. Above 25,000 we make ₹10. Between 25,000 and 24,590 we make more, peaking at ₹210 right at 24,800. Below 24,590 we lose, and the loss is capped at ₹190.

Compare it with the symmetric version

Now build a normal butterfly with the same centre: buy the 25,000 put at ₹180, sell two 24,800 puts for ₹220, and buy a 24,600 put, say at ₹55 (again a made-up number). We pay ₹235, receive ₹220, and have a net debit of ₹15.

Maximum profit at 24,800 is 200 − 15 = ₹185. Maximum loss is the ₹15 debit, on either side. So the regular butterfly risks very little but loses on a rally. The broken wing version risks more, ₹190 against ₹15, but only on a fall, and it actually makes a little on a rally while paying more at the sweet spot.

Neither is better in the abstract. The question is whether you would rather lose a little in both directions or nothing in one direction and more in the other.

When Traders Reach for It

tastylive lists the broken wing butterfly as neutral to slightly directional and says it prefers to set it up when implied volatility is high, opening it for a credit. Its explainer adds that the structure benefits from a fall in volatility and from the passage of time. That fits the mechanics: you are net short options at the body, so you want premium to drain away while price drifts towards your short strike.

In Indian terms the set-up fits a few situations that come up often:

• A mild directional view with a target, such as “Nifty can slip to the previous swing low but probably not much further”.
• A period of elevated volatility, for instance ahead of a known event, when option premiums are fat and selling the body brings in more.
• A trader who wants a defined-risk alternative to a naked short option, where the far wing caps the damage.

It does not fit a strong trending view. If you expect a 3% fall, a simple bear put spread will usually serve you better, because the broken wing butterfly starts giving back profit once price runs through the short strike.

Managing the Trade Before Expiry

The expiry payoff above is the neat version. In practice, the position’s value before expiry is much flatter, because the options still carry time value. You will rarely see anything near the full ₹210 until the last day or two, even if Nifty sits right at 24,800 for a week.

tastylive says it typically aims to take about half of the maximum profit rather than wait for the full amount. When the trade goes against them, its explainer describes closing the long debit spread for its profit and possibly rolling the remaining short spread to a later expiry if that can be done for a credit. Whether you use exactly that approach is up to you, but having a rule written down before you enter is non-negotiable.

A practical checklist we would use:

• Decide the exit in rupees before you place the order, both for profit and for loss.
• Watch the broken side. That is the only place the trade can hurt you. Once price heads towards the breakeven, act; do not wait for expiry to see what happens.
• Check liquidity in all three strikes. A far out-of-the-money put with a wide bid-ask spread can quietly eat your credit.
• Count costs. Four option legs mean four sets of brokerage, exchange charges and taxes, and on a ₹10 credit those charges can turn a “no-risk” side into a small loss.

The ₹10 credit that makes one side risk-free is so small that brokerage and slippage can wipe it out. Run the costs before you call anything free.

Where the Broken Wing Butterfly Goes Wrong

The structure’s weakness is not hidden. It is the broken side. In our example, a sharp fall in Nifty below 24,590 starts to hurt, and a gap down through 24,400 takes you straight to the maximum loss. The trade is quietly saying “I will be paid ₹10 to ₹210 most of the time, and I will occasionally lose ₹190”. That is fine if you size it so that the ₹190 days are survivable.

The second trap is expiry risk. OIC’s notes on the regular butterfly warn that it has very high expiration risk, because the best outcome needs the underlying to finish right at the short strike, and that is exactly where it is hardest to know how the short options will settle. A broken wing butterfly shares the same body, so it inherits that discomfort. Before you hold one into the final session, check exactly how your contract settles on the exchange’s contract specifications, because index and stock options can be treated differently.

The third trap is greed on the strikes. Push the broken wing further out and the credit grows, which feels good. But the gap between the credit spread and the debit spread also grows, and so does the maximum loss. Widen the wing from 400 to 600 points in our example and, at the same premiums for the narrow side, the worst-case loss rises sharply. Always recompute the max loss after any strike change.

Calls or Puts: Picking Your Side

tastylive puts it simply: use calls if you want the maximum profit and the risk on the upside, and puts if you want them on the downside. Flip our example and you get the bullish version. With Nifty at 25,000, you might buy the 25,000 call, sell two 25,200 calls and buy the 25,600 call. If it is done for a credit, a fall costs you nothing, the sweet spot is 25,200, and the risk sits above.

That is the real appeal. You are not trying to call the exact level. You are saying where you think the market can go, which way it probably will not go, and how much you are willing to lose if you are wrong. If you are still finding your feet with spreads and Greeks, our guide to options trading for beginners in India and our explainer on theta decay in options trading are worth reading first.

The Short Version

A broken wing butterfly is a butterfly with one wing pushed further out. Open it for a credit and one side carries no risk, while all the risk sits on the broken side, capped at the width of the credit spread minus the width of the debit spread minus the credit. It works best for mild directional views when premiums are rich, and it fails when the market runs hard through the broken wing. Do the arithmetic for every scenario before you click buy, and size it for the day the loss shows up.

Disclaimer: This article is for educational purposes only and is not investment advice. The option prices and index levels in the worked examples are hypothetical. Options trading involves substantial risk, including loss of capital. Please do your own research or consult a SEBI-registered investment adviser before making any trading decision.