Weekly Strategy Discussion

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 at ($11.30)

                                  Sell two 610 strike calls at $9.20 each

                                  Skip 615 strike

                                  Buy one 620 strike call at ($6.00)

                                                       Net Credit   $1.10   

At Expiration:

  • 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.     

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