Broken Wing Butterfly
A broken wing butterfly was a variation of the standard butterfly spread where one wing was widened asymmetrically relative to the other, creating an uneven structure that either collected a net credit or reduced the cost of entry while intentionally leaving one side with a defined but larger potential loss compared to a symmetric butterfly.
In a standard butterfly, the distance between the lower long strike and the short middle strike equalled the distance between the short middle strike and the upper long strike. A broken wing butterfly deliberately made one of these distances larger, breaking the symmetry. For example, in a call broken wing butterfly on Nifty, a trader might buy a 21,800 call, sell two 22,000 calls, and buy a 22,400 call instead of the symmetric 22,200 call. The wider upper wing changed the premium dynamics: in many cases the position could be entered for zero cost or even a small net credit.
The trade-off was asymmetric risk. In the call broken wing butterfly example above, the position had limited risk on the downside (all options expire worthless if Nifty fell well below 21,800, but the net credit meant the trader collected money), moderate risk in the body of the structure, and a larger loss zone above the upper long strike than a symmetric butterfly would have produced. Traders accepted this upside gap risk because the structure was either free or a credit to enter, compared to the net debit of a symmetric butterfly.
The broken wing butterfly was particularly popular in India's weekly Nifty and Bank Nifty options because the structure could often be entered for a small net credit given the specific shape of the skew and the pricing of near-expiry options. Since weekly options decayed very rapidly, a credit received at entry was essentially kept in full if the underlying closed anywhere below the lower long strike at expiry. The maximum profit zone remained around the short middle strikes, just as in a standard butterfly.
Delta management was different from a symmetric butterfly. The asymmetric wing created a net directional bias: a broken wing butterfly with a wider upper wing had a slight bearish delta bias at initiation, as the upper long call provided less upside protection than a symmetric wing would. Traders who deployed broken wing butterflies had a mild directional view embedded in the structure — they were not purely market-neutral.
NSE's margin framework treated the broken wing butterfly as a defined-risk structure on the side with the intact wing, but the broken wing side was evaluated as a spread of the relevant width, with SPAN margin applied accordingly. The specific margin treatment varied by broker and margin calculator implementation, and traders were advised to verify actual margin requirements before deployment.