June 11, 2019

The Construction of a Broken Wing Butterfly

Many traders shy away from trading options because for many reasons.  The two main ones I have encountered are either they are too complicated or there is too much risk or a combination of both.  

The risk part is simply just not true.  If used properly, options afford traders MORE control of their risk and not the other way around.

The complication issue really is not true either.  When you break down options to what they actually are, many of the complexities go away.

 Let’s take the example of a broken wing butterfly.  It sounds complicated, right?  But if you break it down to what it really is, it’s simply buying one vertical spread and financing some of that capital outlay by selling another vertical (with narrower strikes) against it.

Click the video below to see how we construct a spread of this type.

Follow me on Twitter: @MikeShorrCBOT

about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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