Broken Wing Butterfly – Options Education
Why We Love the Broken Wing Butterfly
A unique trade with an excellent risk-to-reward using a relatively small investment.
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Hi everybody and welcome to San Jose Options! In this demonstration, we’re going to be showing you what we really love about the broken wing butterfly. The broken wing is one of the only strategies I know of, at this point, that can actually make a nice profit and we can lock in the profit with a little adjustment and at the same time as locking in the profit, we can still make much more return of the particular trade. This is a very unique strategy and a very unique situation that you’ll only see in the broken wing butterfly.
Let’s consider a trade on SPX. SPX is one of our favorite vehicles for trading butterflies and in this example, we’ll be using SPX. We’re trading SPX and the market is currently sitting on support and we’re forecasting a bullish move. We construct a broken wing butterfly to the upside. It’ll look something like this. Here’s a drawing of what the broken wing butterfly looks like. If we constructed one on SPX to the upside, this is somewhat what it would look like. Now, obviously, I drew this, but if you’re using software like Thinker Swim for example, it’ll give you a graph somewhat like this. Imagine, the yellow line here is your breakeven. This is your zero profit line right there. To the left side, you have limited risk. Let’s say, some of these trades might be as cheap as $10. It depends what underlying you’re using. But if you’re using like Spyer, Diamonds, sometimes you’ll find them $10. SPX you might find one of these trades for $100, maybe it’ll be a few hundred dollars and so on. Anyway, the idea is that you have very limited risk if the market should go down. That’s mainly what you want to see here where if the market goes to the left; this would be to the downside of the market. You just lose a small investment. But now, if the market goes up, like we’re planning, like we’re forecasting here, you could actually have an excellent return. I’ve seen some up to like 5,000%. It’s a really interesting kind of trade because you have such an excellent risk-reward ratio.
The super interesting thing about this trade, the thing that I love about these trades, is that if the market does trend your direction and you start to realize a profit on the trade, you can actually lock in the profit. This is something you can’t do with other trades like condor, for example. Like if you’re ahead on the condor, you just have to exit the trade. But this one, for example, you can actually capture your profit and possibly stay in the trade longer to make that 5,000%. It’s very interesting.
Now you’re probably wondering how you could possibly lock in a return and still possibly make more. Actually, it’s not too complicated. What we do is we take this line here and we move it up here and now you see that we have our earnings locked in the return and we just modify our position a little bit. We end up with something like this. Now you can see what we’ve done here. Let me extend this a little bit. What we’ve done here is we’ve changed our trade just a little bit so that if the market goes back down to the left side, now, we can’t lose anything. We’ve now made all that money on the trade but if it continues to go up, we might still get in this range here and make a thousand percent, maybe just 50%. But still, we have the capability, the possibility to make, like, 5,000% if the market should go up in this range. But that’s not what we’re talking about. What we’re talking about is that we can actually make a profit, 10%, 20%, 30%, whatever happens to be, lock it in. if the market goes back the other way, it’s yours. And if the market goes up further, well, you can make more.
There you have it. That’s why we love broken wing butterflies. It’s a very unique trade. It gives you an excellent risk to reward, small investment and sometimes produces phenomenal returns. But what I really love about this strategy is that what you have some return, some yield in the trade, you can lock it in and it’s yours forever.
Once again, thank you very much for watching this video. For more information, please give us a call there. We have a 45-minute video on options waiting for you for free and we’ll be glad to talk to you about options, about your goals, and about our mentoring program. Thank you and have a great day.