Recent Regulation Changes with Broken Wing Butterflies

Author: Morris Puma

The Broken Wing Butterfly has been around for quite some time but it's never gained much popularity. It's not such an abstract concept really. It's simply a butterfly spread constructed of two verticals which are different widths. You can also construct a very similar trade by using the same spread widths and unbalancing the number of contracts.

Recently, brokers had to change the buying power effect calculation on Broken Wing Butterflies, making them cost more than before. So to comply with recent regulations we find it's better to use unbalanced Butterflies instead of Broken Wing Butterflies if you want to take advantage of this strategy.  This will keep the cost down.

In addition we find by using Unbalanced Condors we can construct similar trades to Unbalanced Butterflies, but they are even more flexible.

Overall, they are both very interesting trades to study and when constructed correctly, they can limit your risk when trading options.