The Weekly Strategy Discussion is designed to assist individuals in learning how
options work and in understanding various options strategies. Options involve risk and are not suitable
for all investors. The strategies discussed are for educational and illustrative purposes
only, and should not be construed as an endorsement, recommendation or solicitation to buy or
sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.
Broken Wing Butterfly
Example: OEX is at $600
Outlook: You are slightly bullish on OEX over the next 30 days and are looking to generate income using options.
Possible strategy: Broken Wing Butterfly to take advantage of short term time decay.
Buy one 605 strike call ($11.30)
Sell two 610 strike calls $9.20 each
Skip 615 strike
Buy one 620 strike call ($6.00)
Net Credit $1.10
- All contacts expire and profit = Net Credit
All contracts expire and profit = $1.10
- Maximum Profit = (610 - 605) + Net Credit
Maximum Profit = $6.10
- Maximum Loss = (620 - 615) + Net Credit
Maximum Loss = $3.90
- Breakeven = 615 strike + Net Credit
Breakeven = 616.10
In Summary: The Broken Wing Butterfly is a limited risk and limited profit strategy. It is most profitable if the underlying rises to the short strike at expiration. Maximum profit is difficult to achieve so some traders close trade when a suitable profit is attained.