Broken Wing Butterfly BWB

Quick answer: A Broken Wing Butterfly is a defined-risk butterfly with deliberately unequal wing widths, skewed so the structure costs almost nothing and the loss is small on one side and larger on the other, moving risk toward the direction the trader considers less likely.

In simple words

A broken wing butterfly is a normal butterfly with one wing stretched wider than the other. In an ordinary butterfly both wings are the same distance from the body; here one is deliberately made wider, which changes the cost and the risk. The payoff between the wings can be made to open for almost no cost, or even a credit, but the wider wing leaves a larger possible loss on that side and a very small one on the other. Traders skew the wings to make the position cheaper or to shift the risk toward the direction they think is less likely to happen. The total risk does not vanish — it just moves.

Payoff diagram

Professional explanation

What breaks the wing

This broken wing butterfly buys the 23,900 call, sells two 24,200 calls, and buys the 24,600 call. The lower wing is 300 points wide (23,900 to 24,200) and the upper wing is 400 (24,200 to 24,600) — deliberately unequal, which is what makes it broken. In a symmetric butterfly both wings would be equal and the cost higher. Widening the upper wing reduces the price of the far long call, cutting the net debit to just 6 per unit here, close to costless, in exchange for a different, asymmetric risk profile.

Where the small and large losses sit

Below 23,900 every call expires worthless and the loss is just the 6-point debit — a negligible ₹450 on a lot. The peak is at 24,200, where the 23,900 call is worth 300 and the shorts expire: payoff = 300 − 6 = 294 per unit, ₹22,050. Above 24,600 the intrinsic values net to −100, so with the debit the loss is 106 per unit, ₹7,950 — the maximum loss, on the broken (upper) side. The asymmetry is explicit: the loss is small on the downside and larger on the broken upside, because the wider wing gives less protection there.

The breakevens and the skew

The lower breakeven is the base strike plus the debit, 23,900 + 6 = 23,906. The upper breakeven is on the downslope from the peak, at 24,200 + 294 = 24,494. Between these the position profits, peaking at 24,200. The skew here has moved the larger loss to the upside and made the downside almost free, which suits a trader who considers a sharp rally less likely than a hold or drift. Reverse the skew — a wider lower wing — and the small loss moves to the upside instead.

Skewing moves risk, it does not remove it

The central point of a broken wing butterfly is that skewing the wings always relocates risk rather than eliminating it. Making one side almost free necessarily makes the other side's loss larger or the peak narrower; the total risk the market prices cannot be conjured away by choosing strikes. A trader uses the skew to align the small loss with the outcome they consider more likely and to accept the larger loss where they consider it less likely. It is a way to express a directional lean within a defined-risk, butterfly-shaped position, not a way to get a butterfly for free.

Construction

1. Buy one lower-strike call (here the 23,900 call) as the near wing.
2. Sell two middle-strike calls (the 24,200 calls) to form the body at the target level.
3. Buy one higher-strike call (the 24,600 call) as the far wing, placed deliberately wider than the near wing.
4. Confirm the unequal wing widths (300 below, 400 above) and the resulting small net debit, and note which side carries the larger capped loss.

Market outlook

A trader may study a broken wing butterfly when the view is neutral with a directional lean and a near-costless, defined-risk expression is preferred. The skew is chosen so the small loss aligns with the more likely outcome and the larger loss sits where a move is considered less likely — here the downside is almost free and the broken upside carries the larger loss. It wants price to drift toward the body strike by expiry and, being net short the body, benefits from falling volatility. The condition that invalidates it is a decisive move into the broken side, realising the larger capped loss.

Risk profile

The broken wing butterfly is a defined-risk position: both wings are long calls that cap the two short body calls, so the loss cannot exceed a known amount on either side. The asymmetry is the point — here the downside loss is only the 6-point debit, ₹450 on a lot, while the broken upside loss is 106 per unit, ₹7,950 on one NIFTY lot of 75. Both are capped and known before entry. Before expiry the net-short body gives negative gamma near the peak, so a move up through the shorts marks against the position quickly; on cash-settled index options there is no assignment risk.

Reward profile

The maximum reward is the near-wing width minus the debit, times the lot size — (300 − 6) × 75 = 294 × 75 = ₹22,050 — earned if the underlying settles at the body strike of 24,200. Away from the peak the reward tapers to the breakevens at 23,906 and 24,494. Because the structure is opened for only a small debit, the reward is large relative to what is risked to enter, though it remains a point outcome at the body strike rather than a broad plateau.

Margin requirement

Because the two short body calls are covered by two long wings, the exchange grants spread benefit and margin reflects the net capped structure rather than naked shorts. The asymmetric wing does not remove the hedge, so the requirement stays modest, close to that of a spread. SPAN plus exposure applies, it can rise as price approaches the short strikes, and NSE and brokers revise the formulas periodically.

Greeks exposure

The sign on each Greek above is computed, not asserted: it is the net exposure of the illustrative legs at spot 24,000 with 30 days to expiry, priced with Black–Scholes using each leg's implied volatility calibrated from its own quoted premium. A sign can flip as the underlying moves — the panels below show where. See Methodology.

Volatility impact

Near its peak the broken wing butterfly is short volatility, being net short the two body calls, so falling implied volatility lifts it toward its maximum and rising volatility flattens it and marks it down. That is why it is generally opened when volatility is elevated and expected to ease. The skew does not change this volatility character; it changes where the capped losses sit. A volatility spike into the broken side is doubly unhelpful, both lowering the mark and often accompanying the move that carries price toward the larger capped loss above the far strike.

Time decay

Time decay works for the broken wing butterfly once price is near or below the body strike, because the net-short two body calls lose their time value in the position's favour, and the peak sharpens at 24,200 as expiry nears. If price has moved into the broken side above the far strike, the position sits near its larger capped loss and decay has little further to do. On the almost-free side, time simply confirms the small debit. The structure therefore wants time to pass with price resting near the body, and it is most sensitive to decay in the final two weeks.

Practical examples

Lot sizes used above (NIFTY 75, BANKNIFTY 30) are those in force at the time of writing; NSE revises them periodically. Figures exclude brokerage, STT, exchange charges, stamp duty and GST, all of which materially affect small spreads.

Common mistakes

• Believing the skew makes the butterfly cheaper without cost — it only moves risk, leaving a larger capped loss on the broken side or a narrower peak.
• Placing the larger capped loss on the side price is more likely to move toward, so the small loss aligns with the wrong outcome.
• Expecting the full peak profit regardless of settlement — it is earned only near the body strike, and a move into the broken side turns the position into its larger loss.
• Opening it when implied volatility is low and likely to rise, which works against a structure that is short volatility near its peak.
• Confusing the near-costless entry with low risk, when the broken side still carries a capped loss many times the debit.
• Ignoring the negative gamma into the broken side, where a move near expiry marks the position down quickly before the far wing fully engages.

Advantages & disadvantages

Adjustments & exits

• Rolling the far broken wing closer as price approaches it, reducing the capped loss on that side at the cost of paying premium and lowering the peak.
• Rolling the whole structure up or down to re-centre the peak on the new price, which collects or pays premium and resets where the small and large losses sit.
• Closing the position once a large fraction of the peak value is realised, to bank the gain before late gamma into the broken side can reverse it.
• Converting toward a symmetric butterfly by adjusting the far wing, paying to equalise the risk if the directional lean that justified the skew has weakened.

Adjustment is a decision about risk, not a way to rescue a losing view. See Adjustments and Exit Planning.

Professional usage

Desks use broken wing butterflies to express a defined-risk directional lean at very low cost, skewing the wings so the near-costless side faces the more probable move and the larger capped loss sits where a move is deemed unlikely. They size the structure by the local gamma and vega it adds and hedge residual delta with futures, holding many across strikes so the book, not one trade, carries the view. Retail traders can replicate the exact strikes but not the cross-margin or execution quality, so while the structure is accessible, the ability to warehouse and adjust it cheaply is not.

Frequently asked questions

Voice search & related questions

Natural-language questions people ask about the Broken Wing Butterfly.

Sources & references

• NSE — Options trading and margins
• Sheldon Natenberg — Option Volatility and Pricing
• CME Group — Options strategies education

Last reviewed 9 July 2026. Educational content only — not investment advice.