Broken Wing Butterfly Trade Recaps And Trading Rules – One Loser and One Winner

Strategy Overview:

In the past few months, I’ve been experimenting with Broken Wing Butterfly trades and this post looks at a couple of closed trades.  My interest in the strategy has grown out of what I’ve seen the guys over at Capital Discussions doing with their trades.  They have some great traders in their community and I highly recommend you check out what they’re doing.  I’ve learned a lot from Tom Nunamaker, Dan Harvey, Ron Bertino, and Jim Riggio and suspect you will as well.

As discussed in this post, the range of profit on a BWB can be extremely wide.  Additionally, the trades can be constructed in a way that there is little upside risk with a very flat (safe) T+Zero line.  The BWB trades I’ve been testing (live and obviously for your benefit as well) have been quite varied.  I’ve traded some BWB’s with the short strikes centered at 25 Delta, some that start with the upper long 20 points below the money, and I’ve used different days to expiration ranging from 35 DTE to 80 DTE.  In all cases, I’m looking at BWB’s that are entered for a small debit of less than .75 and I’ve developed a preference for trading the BWB’s in SPX.

The reason I prefer SPX for the BWB’s is that the index is roughly twice as large as RUT and has 5 point strikes meaning there’s more granularity.  That granularity helps with strike selection and makes it easier to build a more favorable risk profile.  In general “cheap” trades that are closer to the money seem to reach a higher yield, which is consistent with what we’d expect.  Trades with fewer DTE decay much more quickly, but the speed of decay comes with a smaller profit zone along the T+Zero line.

This post look at two recently closed trades.  The first trade was a loser in RUT and the second was a winner in SPX.  Both of the positions had to sit through some large down moves in the market.

The Loser – Russell 2000 ($RUT) Broken Wing Butterfly:

The RUT BWB started on January 6, 2016 when I bought the 70 DTE 990/1030/1060 Mar 16 BWB for a debit of 0.55.  At the time, the market was trading around 1090 and seemed “oversold.”  The short strikes of the Butterfly were around a 25 delta when I got involved, but the market went straight to the bottom of the position fairly quickly.

RUT Broken Wing Butterfly Trade Price Chart
Image of the position on the day of entry:

RUT Broken Wing Butterfly Trade Entry

The market headed south immediately after entry and RUT was quickly inside the body of the Butterfly.  Despite the fast move lower, the trade really wasn’t down much money.  The image below shows the trade after the market traded down 50 points or around 5% in about a week.  The trade is still hovering around break even.  Nice.

RUT Broken Wing Butterfly Options Trade 2
As we all know, the market continued lower and price quickly went below the short strike of the Butterfly so I bought a 5 point debit spread to hedge the downside. I planned to close the debit spread on a recovery, but the recovery never happened. The trade with debit spread is shown below.
RUT Broken Wing Butterfly Options Trade Hedged
A day or two after the image above was taken, RUT solidly violated the expiration break even on the downside and I chose to exit the position.  I could have rolled the trade lower, but the loss on the position was only around $100 so I decided to just take the hit and move on.

Lessons Learned from the RUT BWB:

In the RUT trade, I should have simply rolled the position when price traded to the lower expiration break even.  At the time the market seemed “oversold” and I expected a rebound so I decided to hedge and see if the trade could run longer.  The problem is that the hedge did very little to help the position and was expensive to execute.  As a result, I’ll just be rolling the positions lower in the future.

The CIB also rolls lower on the downside and I prefer the simplicity of repositioning rather than hedging.  If the market reverses after the roll lower, the BWB has a small potential loss so we don’t need to be overly concerned about defending the upside.  Since the trades are entered for such a small debit, there are numerous ways to pick up enough of a credit to lift the expiration break even above the zero line.

Another big take away from the trade is that despite being wrong from basically the moment of entry, the position takes little heat.  Despite a big move lower shortly after entry, the position didn’t come under pressure until the market went to the lower side of the Butterfly.  Had I rolled lower early on, the position would have been just fine and the loss on the roll would have been smaller and easily overcome.

The trade ended with a loss of $121 after commissions and the order specifics are listed on the Results Spreadsheet in the January closed trades section.

The Winner – S&P 500 ($SPX) Broken Wing Butterfly:

I definitely prefer winning trades.  The SPX trade was another Broken Wing Butterfly that was entered on January 14th, 2016.  The trade was entered with 25 delta short strikes (1795/1840/1875), 35 days to expiration, and for a debit of 0.65.  SPX ended the day around 1920 on the day of entry.

SPX Broken Wing Butterfly Options Trade Entry Rules
From the 1920 area, SPX quickly moved down into the body of the Butterfly.  A week later the market was into the top part of the Butterfly and trading around 1860.  Despite the 60 point move lower the trade was only down about $10.
SPX Broken Wing Butterfly Options Trade
Around two weeks into the trade, the market recovered from lower levels and was trading back around the 1900 level.  The T+Zero line was rising and, as shown below, the range of profit was wide.  Since the trade was sitting right around the sweet spot of the T+Zero line, I took the trade off for a profit of $98 after commissions ($110 gross).  The position had a good return in two weeks while taking very little directional risk or heat.
SPX Broken Wing Butterfly Options Trade 2

Broken Wing Butterfly Strategy Moving Forward:

Going forward, I’m going to continue trading SPX Broken Wing Butterflies as a way to diversify my trading.  The trades are lower yield than the CIB, but compliment that position well.  The CIB tends to benefit from down moves in the market, while the BWB’s can handle large up moves with little trouble.

Rather than saying I’m only going to trade X Butterfly at X DTE, I’ll be diversifying the positions in time as well.  My rough plan is to get involved in a shorter dated (35ish DTE) one week and then a longer dated BWB the next week (50-80 DTE).  My goal is to have around 4 different positions open at at time.

I’ll be selecting the trades based on my market opinion.  When I’m more bearish, the trades will be further from the money.  When I’m less bearish they’ll be closer.  As a self-proclaimed perma-bear, most of the trades will be at least slightly away from the money.  If we move into a more Bullish market environment (yeah right!), I’ll move the trades closer to the money.

Thanks for reading and please share this post if you enjoyed it!


  • sherin pat

    Thanks Dan for sharing trades and your thoughts for the BWB! I am happy to see your experiments with the BWB. That triggers new thoughts for me and other viewers too.

    • Dan

      Hi and thanks for the comment! I’m happy to hear that they’re giving you something to think about. Feel free to get in touch via email if you have any questions.

  • Betel Geuse

    Great post and thanks for the analysis! One question for you is, how easy to get orders filled on these 4 legged spreads? I found order fills on SPX can be very tricky at times even with 2 legged spreads. Thanks again for your post!

    • Dan

      Thanks Betel! You know, the Butterfly pricing is always a little strange. With all the moving parts it can be hard to determine the true mid. When I’m getting involved in a new trade I’m just being really patient and taking time to work the orders. Basically, I start below my expected debit and then move closer to the market until I get a fill. Even though the mid bounces all over, if you watch it you’ll start to get a sense for where it wants to trade. I haven’t tried to execute the legs individually, but I may move to that in the future. We’ll see. Hope that helps.


  • kUser

    Lessons from real trades is most important for us. Thank You, Dan!

    • Dan

      Sure thing, I’m happy to share! I agree, we learn much more from real trades.

  • OptionMilk

    I’ve been trading these in the SPX for awhile now. They held up well last August when the market dipped. You’re correct in that they can take a lot of heat and respond well even if volatility kicks up. I traded longer term BWBs that were about 90 days out. You can get returns of 15% or 20% (not always but often) provided you stick to your rules and adjust appropriately. I learned about them on the sheridan mentoring website in one of the forums last year. That being said, I got stomped the first two weeks of this year when I decided to ignore my rules and wait it out rather than take some losses. Thanks for the post and let me know if you are interested in how I traded them.

    • Betel Geuse

      I am very interested in your method. Can you let us know how you trade them? Thanks!

    • Dan

      Hey and thanks for dropping by. Interesting name as well. I agree that ignoring our rules never seems to end well in the long run. One of the things I’ve noticed with the longer dated BWB’s is that obviously they’re less price sensitive and consequently slower. I guess that’s what we’d expect. Sure, I’d be interested in hearing about how you’re trading them. Feel free to post back here and/or shoot me an email. It looks like Betel (see below) is interested in hearing more as well.


      • OptionMilk

        Ok. I would start the trades at between 83-92 days to expiration. No real reason behind when I put it on but I found that sometimes I couldn’t get the strikes I wanted until I got closer to 83 days out. I put on 1 put credit spread 50 points wide and 1 call credit spread 40 points wide. The short puts and calls were between 15 and 25 points below the current market price at the money. Generally, if I felt the market was heading higher, I would put the short strikes closer to 15 points below ATM. If I felt the market was heading lower, I would put the short strikes closer to 25 points below ATM. I then used OptionNET Explorer (you can do the same with thinkorswim) to project out the profit and loss line out to 30 days before expiration. The profit and loss line crosses the 0 line at two points: one about 35 or so points above ATM and one about 75 or so points below ATM (this distance will vary based on time to expiration and current volatility levels). These two points are adjustment points. Just leave the trade alone until it hits your profit/loss target (10% if you are more conservative or upwards of 20% if you want to push it) or either adjustment point. At the adjustment points, buy a debit spread to flatten the delta. If the market reverses, take off the debit spread when the market value of the spread hits half of what you paid for it. Then wait until the trade hits your profit/loss target and close out the trade. It’s a relatively simple trade and is ideal if you can’t always be close to a computer while the markets are open. I believe my mistake with this trade was that I scaled up when I shouldn’t have and went for bigger percentage gains when I should have been satisfied with getting out of the trade and reducing exposure. I would strongly encourage paper trading it and backtesting it if possible.

        • Dan

          That’s interesting, thanks for sharing. In general it seems like a lot of the BWB strategies are fairly similar. We all have slightly different selection and management rules, but conceptually we’re doing about the same thing(s). A lot of the DTE and strike selection choices are personal preference. For example, I prefer trades with a small debit rather than an initial credit in case the market moves lower immediately after entry. In a different market environment I might feel different about that though.

          Your observation about going for larger percentage gains is a good realization. It’s easy to get into trouble when we start thinking about how much we can make rather than controlling risk and/or closing positions. Anyway, thanks for dropping by and sharing!


          • OptionMilk

            Thanks! I’m happy to contribute to the discussion. I only found your site a month or two ago. You have some great content here and I enjoy reading your commentary at the end of every week.