Broken Wing Butterfly in SPX

Why It Matters

The strategy shows how traders can lock in high‑probability, time‑decay income while defining risk, a valuable approach as equity volatility persists.

Key Takeaways

• Choose longer-dated options for extra time value and wider strikes
• Construct a 1‑to‑2 broken‑wing butterfly using SPX puts
• Buy 6200‑strike put, sell two 6150‑strike puts, add 6050 put
• Trade offers ~90% probability of profit with positive theta
• Expect about $4 daily credit and minimal delta exposure

Summary

The video walks through constructing a broken‑wing butterfly on the S&P 500 index (SPX) using put options, and explains why the trader opts for the April series (58 days) rather than the nearer‑term March series.

By selecting a longer expiration the trader captures additional time value, allowing him to sell strikes farther out‑of‑the‑money while still receiving the same credit. The structure consists of buying one 6200‑strike put (≈15 Δ), selling two 6150‑strike puts, and buying a protective 6050‑strike put to cap downside—a 1‑to‑2 ratio that creates a $50‑wide put spread with an extra $100 wing.

He notes the trade has roughly a 90 % probability of profit and generates about $4 of positive theta per day, while maintaining a modest delta of roughly 0.1 (10 SPY points). The position was filled at 355 cents, illustrating the credit received for the defined‑risk spread.

For options sellers, the setup demonstrates how extending duration and using a broken‑wing butterfly can provide high‑probability income with limited risk, a useful template for managing exposure in a volatile equity market.

Original Description

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