Broken Wing Butterfly Options Spread and Adjustments | Long Iron Condor | Bear Call | Bull Put | BWB

Link to our Telegram Channel - https://t.me/niftybn
Link to our Twitter Profile -   / niftybn  

In this video we would learn about the adjustments that can be made to a troubled broken wing butterfly spread, which is a variation of the traditional long Butterfly options spread.

But before we dive into the adjustments, let's have a quick recap of what a BWB options spread is.

Example:

Nifty is at 10,815 on July 13th, 2020. A broken wing butterfly call spread can then be entered as follows:

B 1x 30th July 10400 strike price Call at 482.75
S 2x 30th July 10800 strike price Call at 212.6
B 1x 30th July 11000 strike price Call at 120.1

Note that the middle strike should be as close to at the money as possible. Also, the distance between the higher and middle strikes should be less than the distance between the lower and middle strikes.

Calculations:

Net debit = The sum of all options purchased - The sum of all options sold = 482.75 + 120.1 - (2 x 212.6) = 177.65.
Max Loss at Expiry = Net debit x Lot size = 177.65 x 75 = ₹13324
Max Profit at Expiry = (Middle Strike Price - Lower Strike Price - Net Debit) x Lot size = (10800 - 10400 - 177.65) x 75 = ₹16676
Fixed Profit = [(Middle Strike Price - Lower Strike Price) - (Higher Strike Price - Middle Strike Price) - Net Debit] x Lot Size = [(10800 - 10400) - (11000 - 10800) - 177.65] x 75 = (700 - 300 - 382.25) x 75 = ₹1676
Lower Break Even Point = Lower Strike Price + Net Debit = 10400 + 177.65 = 10578

There is no upper break even point. Also the setup gives you a fixed profit on the upside of about ₹1676.

Risk graph:

From the risk graph it is evident that the strategy has no upside risk (if placed correctly). The break even point is below at the money at 10578. The maximum profit at expiry is ₹16676 and the maximum loss at expiry is ₹13324. Note that the position makes money in 3 scenarios - if Nifty moves higher, stays sideways or moves only slightly lower.

Now let’s look at one of the common mistakes made by the beginners when they start trading options. On the other side of the video we will look at the possible adjustments that can be made to a troubled broken wing butterfly spread.

Adjustments:

Say, about one week into the trade, Nifty dropped to 10600.

The first adjustment would be to add another broken wing butterfly spread to the tested side with the lower strike of the original broken butterfly spread as the middle strike and maintaining the same distance between the wings as the original broken wing butterfly spread.

Buy one lot of 30th July 10200 strike price Call
Sell two lots of 30th July 10400 strike price Call
Buy one lot of 30th July 10800 strike price Call

This would leave us with a Condor with calls kind of setup.

The said adjustment would widen the profit range but both the profit potential and risk would decrease.

The second adjustment would be to add a bear call spread and a bull put spread to the tested side with the lower strike of the original broken wing butterfly spread as the lower strike of the bear call spread.

The size of the bull put spread, that is, the distance between the strikes, should be the same as the distance between the middle strike and higher strike of the original broken wing butterfly spread, whereas, the size of the bear call spread, that is, the distance between the strikes, should be the same as the distance between the middle strike and lower strike of the original broken wing butterfly spread

Sell one lot of 30th July 10400 strike price Call
Buy one lot of 30th July 10800 strike price Call

Sell one lot of 30th July 10200 strike price Put
Buy one lot of 30th July 10000 strike price Put

This would leave us with an Iron Condor kind of setup.

The said adjustment would widen the profit range but both the profit potential and risk would decrease.

The third adjustment would be to add a bear call spread to the tested side with the lower strike of the original broken wing butterfly spread as the lower strike of the bear call spread. The size of the bear call spread, that is, the distance between the strikes, should be the same as the distance between the middle strike and higher strike of the original broken wing butterfly spread.

Sell one lot of 30th July 10400 strike price Call
Buy one lot of 30th July 10600 strike price Call

This would leave us with a long Butterfly spread kind of setup.

The said adjustment would reduce the risk. Do this only if you anticipate the price to recover and close in between the long strikes at expiration.

The fourth adjustment would be to add a put to the tested side.

Buy one lot of 30th July 10200 strike price Put

This creates a kind of slingshot effect. Do this adjustment only if you anticipate the price to fall drastically as any big downward move in the price would make you a good profit but the risk would be more if the price closes in between the strike price of the put and the lower strike of the original BWB at expiration.