How to remove risk from your Broken Wing Iron Butterfly trade; Zero or Low Risk Broken Wing Iron Fly

In this video we will learn how to remove risk, either fully or partially, from a broken wing butterfly trade.

But let’s first learn what a broken wing butterfly is and how it is different from a traditional butterfly spread.

A traditional butterfly spread consists of the purchase of one option with a lower strike price X1, and one option with a higher strike price X2 along with the sale of two options with a strike price that is halfway between X1 and X2.

The options have the same underlying, and have the same expiration date. The underlying can be an index or a stock.

A traditional butterfly spread is usually created using either all call options or all put options where you have a debit and credit spread joined at the short strike price of both spreads.

Now there is also another variation known as the Iron Butterfly.

The Iron Butterfly is made up of a put option credit spread combined with a call option spread just like Iron Condor except that, once again, you have the spreads joined at the short strike prices. The spread width is even, that is, the call spread and put spread are of equal width.

The breakeven of the Iron Butterfly is narrow, but the risk is small, and the reward is large.

To increase the probability of success, the Iron Butterfly can be broken so that the spread width is uneven. This makes the Iron Butterfly change from a low probability of profit, low risk trade to a higher probability trade with higher risk.

While the Iron Butterfly trade profits only if the underlying ends at a particular strike price at expiration, the Broken Wing Iron Butterfly trade profits if the underlying goes in one direction as well.

So, the position can profit from two scenarios instead of just one, thus increasing the probability of success.

It is usually done for a small credit or no cost but the only drawback is the maximum loss can sometimes be greater than the maximum profit.

The position can be constructed to have either a bullish bias or a bearish bias and when the underlying moves in the direction of our bias we will get an opportunity to remove the risk, either fully or partially, from the position.

Let's now take a look at a real life trade example.

On July 8th, 2021, I initiated the following Broken Wing Iron Butterfly trade on Nifty with a bearish bias.

When we initiated the position the spot was at about 15800 . So the long put strike was ATM and the short strikes were about 200 points away from the spot and the long call strike was 400 points away from the short strikes.

Margin Requirements:

The final margin required for the above setup is about ₹1.2 lakh and the required margin can be anywhere between 2 and ₹4.5 lakh depending on which leg of the trade you initiated first. Enter the buy option trades first to get the maximum benefit of the new margin rules. The probability of profit at expiry is about 70-75% for this strategy.

The premium received is ₹35745. The maximum profit at expiry is ₹35595 and the maximum loss at expiry is ₹24255. As you can clearly see, the maximum profit is greater than maximum loss, which is not always the case. The risk to reward ratio of the position is 1:1.47.

Risk graph:

From the risk graph it is evident that the strategy has a wide profit zone and that explains the high probability of profit. There is only one break even point and it is at 16238.

On 19th July as Nifty moved in the direction of our bias, we exited the 16400 call leg (at 44) and entered the 16200 call leg (at 90.5).

This adjustment helped us to reduce the risk from ₹24255 to just ₹1230. The risk to reward ratio of the position is now a whopping 1:23.27. The margin required has also come down significantly.

The downside to the adjustment is the probability of profit has come down to about 19.68% from the earlier 75% and the maximum profit has also come down from ₹35945 to ₹28620.

Also there is both upside and downside risk in the adjusted position. That is, if Nifty rises above the upper break even point of 16191 or falls below the lower break even point of 15809, the position experiences a loss of ₹1230.

The risk can be reduced further, depending on your risk appetite, by selling weekly OTM call options or spreads above the upper bep when the spot is below the lower bep or by selling weekly OTM put options or spreads below the lower bep when the spot is above the upper bep.

This will change the payoff chart of the position but it is a risk worth taking especially when close to expiry.

Also close to expiry we can consider adding one more butterfly to the trade to increase the profit range of the position. I will update you on the position in a later video.

[SunnySpark_]

Was waiting for this video
2 days ago only you mentioned about this in the group
Great info
Thank you

[sabdulkhaleelullah]

After long time good to c u Ravi, ur videos r always excellent and crispy.

[Dhana_Prasanna_Kumar]

Where you learn all these strategies, I too want learn

[sasikalamukil]

The market moved to a breakeven point and waiting for the adjustment method

[ankurmittal]

Sir make a video on naked call/put adjustments

[ganeshgadi]

Thanks Ravi. nice video. We have also appetite to watch more videos from you.

[arunkumar]

Please Ravi garu please do videos in diifent adjustments on strangles and straddles

[arunkumar]

Please do video on coller stratagy on monthly selling with weekly adjustemnt

[Kautilya]

First thing u have sacrificed your profit to reduce the loss.

Second it reduces the probabolity and again it requires an adjustment

What if trade went in opposite direction after creating BW butterfly....what would be the adjustment

[srskar]

After long time a video from Ravi. Great content. Its not just about one strategy but it gives an overall idea on how to lock profits on untested side to take off risk. Great content. We need more such content videos from you. Many thanks

[sg]

This adjustment is What if the market moved in the other side (Call Side)?

[siddugolabanvi]

Sir please clarify to me i have invested in nifty bees from 2017 still I accumulate 4258 bees so this Statargey apply show me

[pnprvmurugappan]

Sir what should we do when the trade against our bias. Please give solution

[laxsri]

Waiting for the next video to understand the addition of one more butterfly spread.

[bhargavdave]

Very nice strategy. Just a question, as you initiated broken wing butterfly with downward bias then you might have your stop loss level also if market went up. What would you do if your stop loss level hit? Do you make any adjustment or you just take out loss and book it?

[tribalphiz]

Hello Sir, very informative video...just want your advice, what should be the max level to initiate the adjustment. Spot is a the pick or touch the breakeven.

[dks]

Ravi Sir, Glad to see you after a along break.
One Query - What are the advantage and disadvantages in terms of Deploying & Adjustments between IronFly using All CE/PEs and using CEs & PEs 's combinations.