How To Trade A Broken Wing Butterfly

NavigationTrading Trading Options For Income Strategies

The Broken Wing Butterfly is a great strategy to trade in periods of High Implied Volatility. Since they require a relatively small amount of capital, they can be traded in virtually any size account.

In this video post, we will walk you through how to:

1.  Evaluate Implied Volatility
2.  Locate the correct strikes to trade
3.  Analyze the trade
4.  Place the trade

Here’s the metrics we look for when trading Broken Butterfly:

  • Market Assumption – Neutral
  • Implied Volatility – High
  • Trade Setup: Buy 1 ITM Call, Sell 2 ATM Calls, Buy 1 OTM Call (Adjust one of the long calls closer to the money to reduce or eliminate risk on one side)
  • Profit Target – 15-25% of debit paid
  • Downside risk – Defined
  • Upside risk – Defined
  • Probability of Profit – 35-50%
  • Time Decay (Theta) POSITIVELY impacts this position
Want to learn more about how to trade options for income?
Learn More About Trading Options For Income