Broken Wing Butterfly: A Skewed Options Spread Guide
A broken wing butterfly is a butterfly spread with one wing deliberately stretched wider than the other, usually by skipping a strike. That single change turns a small debit into a net credit, removes all risk on one side of the market, and concentrates every rupee of risk on the other.
The whole design is a trade: you accept a larger, one directional loss in exchange for collecting a credit up front and being profitable across a much wider range of outcomes.
Below: the strike layout, a Nifty example with the arithmetic, and how Indian costs and taxes apply.
What makes a butterfly a broken wing?
A regular butterfly uses three strikes at equal distances: one long below, two shorts in the middle, one long above. Equal wings, a small debit, loss capped at that debit either way. Our note on the butterfly spread covers that base case.
To break a wing, you move one outer long option further from the body, skipping the strike you would normally buy. That option is cheaper, so premium from the two shorts exceeds what you pay for the two longs, and the trade opens as a credit.
At expiry the payoff is asymmetric:
- On the narrow wing side you are fully hedged and keep the credit. Between the two nearer strikes you get the usual butterfly tent, peaking at the body.
- Beyond the far strike, you hold a loss equal to the difference in wing widths, less the credit.
Put versions skew risk down, for a neutral to mildly bullish view. Calls skew it up.
A worked Nifty example
Assume Nifty at 25,000, about three weeks to expiry, and a lot size of 75. Confirm the current lot size and expiry schedule on the exchange website, since these are revised periodically. You skip the 24,600 strike, which is what breaks the lower wing.
| Leg | Action | Quantity | Premium | Cash flow |
|---|---|---|---|---|
| 25,000 PE | Buy | 1 lot | 210 | Pay Rs 15,750 |
| 24,800 PE | Sell | 2 lots | 150 each | Receive Rs 22,500 |
| 24,400 PE | Buy | 1 lot | 60 | Pay Rs 4,500 |
| Net | 30 credit | Receive Rs 2,250 |
Check it: 300 points collected, minus 210 and minus 60 paid, leaves a 30 point credit. At 75 units a lot that is Rs 2,250 before charges.
The upper wing is 200 points wide, the lower wing 400, and that 200 point difference is your downside exposure.
What happens at expiry
Above 25,000 every put expires worthless and you keep Rs 2,250. At exactly 24,800, the 25,000 put is worth 200 points and the rest expire at zero, so 200 plus the credit is 230 points, or Rs 17,250. That is the maximum.
Below 24,400, the two long puts offset the two shorts, leaving a shortfall of 400 minus 200, so 200 points. Less the credit, the loss is 170 points, or Rs 12,750, and it stops growing however low Nifty goes. Between the body and the far strike the position is worth spot minus 24,600, putting breakeven at 24,570, about 1.7% below spot.
| Nifty at expiry | Points | Rupees per lot set |
|---|---|---|
| 25,400 | +30 | +Rs 2,250 |
| 24,800 | +230 | +Rs 17,250 |
| 24,570 | 0 | Rs 0 |
| 24,400 or lower | -170 | -Rs 12,750 |
You make money if the index rallies, drifts, or falls up to about 1.7%, and lose only if it falls harder.
Why traders skew the structure
- You get paid to enter, so the trade is not dead on arrival if the index does nothing.
- The profitable range is far wider than a symmetric butterfly, which needs a finish near the body.
- Time decay works for you across most of that range, as with other credit positions in our piece on theta decay.
- Risk stays defined. Unlike a naked short put, the worst case is calculable before you submit.
- You place the skew where your view is strongest.
Where the risk hides
You collect Rs 2,250 to risk Rs 12,750. That works only if a finish below 24,400 is genuinely unlikely, and you accept that a sharp gap down cannot be traded out of at a fair price. Watch the mark to market too: the short strikes can go deep in the money fast.
How do I place and manage one?
- Pick the side you want to protect. Neutral to bullish means puts, with risk skewed down.
- Place the body near the level you expect the index to gravitate towards, since peak profit sits there.
- Keep the narrow wing one strike from the body, and skip one strike on the far side.
- Verify the net credit before submitting. If it prices as a debit, the strikes or the liquidity are wrong.
- Enter all four legs as one basket, so you are not filled on two legs at bad prices.
- Decide the exit in advance, and square off in the money legs before expiry.
Is it better than an iron condor?
Different tools. An iron condor has a flat profit plateau and equal risk on both sides. This structure has a single peak, no risk on one side, and larger risk on the other. Use the condor with no directional view, and the broken wing when you would rather delete one tail than shrink both.
Costs, margin and taxes in India
Index options on NSE are European style and cash settled, so there is no early assignment. Stock options are physically settled on expiry, which is one reason most traders run four leg structures on indices.
STT on the sale of an option is 0.15% of premium, on the sell side. On an option that is exercised or assigned, STT of 0.15% applies to the settlement value and is paid by the buyer. Settlement value is far larger than premium, so letting a small in the money option expire instead of squaring off can cost many times more. That is the STT trap, and holding this structure into expiry with the 25,000 put in the money is where it bites.
Margin is charged despite the defined risk, because the position contains short options. Clearing corporations set SPAN and exposure margin, and the offset depends on how the legs are recognised, as our overview of options margin requirements explains.
Options results are non-speculative business income, reported in ITR-3, and losses carry forward eight years only if you file by the due date.
Risk note: the loss here is several times the credit. Trade it small, on liquid index strikes, and only once you can build the payoff table yourself.
Frequently Asked Questions
Can a broken wing butterfly lose money if the market goes up?
Not in a put version held to expiry, since above the highest strike all puts expire worthless and you keep the credit. Before expiry it can show a mark to market loss in a sharp rally if implied volatility shifts unevenly, but that reverses as expiry nears. A call version does carry upside risk.
How much capital do I need for one broken wing butterfly on Nifty?
More than the maximum loss, because the short legs attract margin. Here the worst case is Rs 12,750, but blocked margin will be higher depending on how the clearing corporation recognises the hedge, plus a buffer for mark to market. Check your broker’s calculator with the exact strikes.
Should I close early or wait for expiry?
Most traders close early. Holding into the last days maximises time decay but also gamma risk, since a small move near the body swings the position sharply. Closing at half to three quarters of the achievable profit avoids both the final week and the exercise STT problem.
Does the wide wing have to skip exactly one strike?
No. One strike is the common starting point because it usually produces a credit without an alarming risk figure. Skipping two increases the credit and widens the profit zone while roughly doubling exposure beyond the far strike. Work out the difference in wing widths first, since that is your loss.
Can I use this on a stock instead of an index?
You can, with two changes. Stock options in India are physically settled, so an in the money leg on expiry creates a delivery obligation. Stock strikes are thinner too, and wide bid ask spreads across four legs eat much of the credit. Indices are the practical venue.
Key Takeaways
- Skipping a strike leaves zero risk on the narrow side and concentrated risk beyond the far strike.
- Maximum loss is the difference in wing widths minus the credit: 400 minus 200 minus 30, so Rs 12,750 per lot set.
- Maximum profit sits at the body strike, Rs 17,250 here, and you keep Rs 2,250 if the index simply rallies.
- Breakeven was 24,570 against a spot of 25,000, a 1.7% cushion.
- Square off in the money legs before expiry, since exercise STT applies to settlement value.
- Margin is blocked despite defined risk, and F&O results are non-speculative business income in ITR-3.
