Major Caveat: I do NOT like This Trade
This one will be for demonstration purposes as I think it’s horrible. But….in the interests of science, my own bias must be set aside. My prejudice must be left at the door. My expressions of loathing clamped by the Parking Warden of balance. You get the picture.
So What IS The Broken Wing Butterfly?
I’ll show by our example:
Regular butterfly strikes FTSE June puts long 7350 @44 short x2 7300 @ 34 long 7250@ 27. So we are paying 44+27 – (34×2)=3
Broken wing ‘fly strikes FTSE June puts long 7350@44, short x2 7300@34 long 7200 @21.5 So…… 44+21.5 -(34×2)= Credit 2.5
Risk Parameters Change With Credit Trades
I hope therefore, you can see the risk of a regular butterfly is limited to the premium paid as you have one long 50 point spread and an equal short spread. The broken wing,therefore, means an extra 50 points of risk. You thus win in both cases all the way down from 7350 to above 7250-ish.
Why Take This Trade?
You feel that the risk is worth taking as you are 5.5(£55 per lot) better off, and so you think the market will not drop that far. Outcome-above 7350 you take in your premium, drink beer. Outcome at <7250 ….ouch. Pain of 50. Remember your short spread is 100 points against your long spread of 50.
The First 30 Trades
We’ve had a great run, and we want to inspire, and motivate. There is now the certainty that strategies will be repeated. We have not covered a fair few, as this is not for advanced or professional traders. We are here to get people started. This is not about bragging rights, or win ratios. Perhaps we are foolishly giving away too much information.