Definition

1. Simply put, a broken wing butterfly is the sale of a ratio spread in which “tails” are purchased to reduce margin and risk exposure.
2. Another way of imagining this spread is to take a normal butterfly and pull the furthest out-of-the-money strike options one or more strike prices further out-of-the-money.
3. This position can also be thought of as the purchase of a butterfly spread with the simultaneous sale of a further out-of-the money vertical spread to pay for the purchased butterfly.