Define Broken Wing Iron Butterfly: call credit spread plus put credit spread with either the put side or call side narrower than the other one.
Dan’s example of a Broken Wing Iron Butterfly: I am going out in duration about 23 days in SPX using the October expiration. I am selling the call credit spread with the width 30 wide and the put credit spread with the width 40 wide. This gives less risk on the upside and more risk on the downside. Both credit spreads are selling the at-the-money option.
SPX is currently around $1946 and we are trading the October Expiration. Buy 1 1975 call Sell 1 1945 call Buy 1 1905 put Sell 1 1945 put Total Credit $2900.
Total Risk on upside= width of call spread times 100 minus the total credit or $3000 – $2900 = $100
Total Risk on downside= width of put spread times 100 minus the total credit or $4000 – $2900 = $1100
Why am I doing this trade? Market is volatile and I want to construct a trade with little or no risk on one side. The SPX is down from the $2100 level about 5 weeks ago and is currently around the $1940-$1945 price, down about 160 points. I would rather be concerned with risk on only one side and with SPX around $1940, I would rather have less risk on the upside.
Want to learn how I would manage this trade through the life of this trade? I will be updating how I am managing this trade every 2-3 days on my blog on Sheridan Mentoring if you’d like to follow along.