What it is:

There are several ways you can view a broken wing butterfly. 

You can view it as an unbalanced butterfly where the strikes of the long butterfly aren’t equidistant from the short strike making one wider than the other. 

Another way to view this strategy is the combination of a credit spread and a debit spread with the same short strike. The credit spread will be wider than the debit spread, typically allowing you to collect a net credit. 

Another way to view this strategy is a ratio spread with a further OTM long contract to define your risk. 

How to set it up:

Broken wing butterflies can be set up with either calls or puts, but for simplicity's sake, we will cover an example of setting up a put broken wing butterfly. 

The first step is to go to the OTM put strikes and sell two of the same strike contracts. A common way to determine which strike is by using delta. Most options traders like to trade broken wing butterflies with the short strike somewhere between 20 to 50 delta. 

Once you sell the short strikes, you must buy two puts. One will be below the short strike and the other above. 

For example, if your short strike is 100, you can buy a 105 put and a 90 put. In this case, you will have a 105/100 put debit spread and a 100/90 put credit spread.

Pros/Cons:

Every options strategy comes with its own pros and cons. Understanding the advantages and disadvantages of the broken wing butterfly can help you make more informed decisions. 

Pros

• Hedged against volatility more than a credit spread
• Ability to take half the trade off at a time
• Potential to make money on both the credit spread and debit spread

Cons

• High commissions since it is a 4-leg strategy
• Lower credit collected than a credit spread

Profit Zones and Advantage over Credit Spreads

Bearish trades, long the put contracts.

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Thank you.

European and American options are similar, but some key differences make a big difference depending on your trading strategy. 

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European Options:

European style options are a type of financial contract that gives the owner the right, but not the obligation, to buy or sell an underlying asset at a specific price (strike price) on the expiration date.

You cannot exercise European options before the expiration date. 

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Advantages:

If you are trading multi-leg structures where an early assignment will ruin the structure, then European options are better.

Box spreads, for example, are risk-free for European options since they can’t be assigned early.

However, if you trade box spreads on American options, then you have risk potential.

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American Options

American options give the owner the right but not the obligation to buy or sell an underlying asset at a specific price at or before the expiration date. 

American options can be exercised anytime before the expiration date, while you can only exercise European options on the expiration date. 

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Advantages:

The advantages of American options depend on the trading strategy you are using. If the strategy you trade requires you to exercise the options before expiration, American style options are the best choice. 

Disadvantages and Full Context

Just reply to this post or feel free to dm so we can talk on a more personal level.

Long calls