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Broken - Wing Butterfly Management

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

When Implied Volatility (IV) is high, we can place a butterfly for a very low debit. This allows us to play for non-movement in the underlying with a large profit potential if the options expire close to our short strikes. However due to the low cost and high profit potential of the trade, these are normally very low probability trades. That being said, is there anything that we can do to increase our probability of profit?

Today, Tom Sosnoff and Tony Battista take a look at Broken Wing Butterflies (BWB). A BWB is set up similar to a Butterfly in that you are long 1 option that is in-the-money (ITM), short 2 options at-the-money (ATM) and long 1 option that is out-of-the-money (OTM). The only difference is that the long OTM option is not the same distance from the ATM options as the ITM option is. This allows the whole trade to be placed for a credit and only have risk to one side. After they set up the trade, the guys look at how managing a winning BWB can increase their win rate even more than the initial probability of profit!

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