Broken-Wing Butterfly Spread Margin
The Formal Definition
The collateral requirement for an asymmetric three-strike butterfly options strategy where one wing is intentionally skipped or widened to create a credit on entry, requiring margin equity to cover the embedded embedded spread gap.
Required Margin = (Wider Wing Width - Narrow Wing Width - Net Credit Collected) × 100 per Contract
Cole Barrett's Reality Check
The Unvarnished Bottom Line"A standard butterfly spread is symmetrical and cheap, but it loses money if the stock moves too far in either direction. A broken-wing butterfly skews the strikes: you widen one side to collect a net credit, which eliminates all risk on one side of the trade. The catch? The broken wing introduces a margin requirement equal to the width of the skipped strike."
Interactive Simulator: Test the Math
Real-World Example: Scenario Breakdown
Examining the real numbers for: Executing a Broken-Wing Call Butterfly on an index trading at $100 (Buy 1x $95 Call, Sell 2x $100 Calls, Buy 1x $110 Call; Skipped 5 Points)
| Execution Metric | Proper Margin Offsetting Desk (Tastytrade) | Legacy Clearing Broker (Disjointed Legs) |
|---|---|---|
| Fee / Rate | $2.60 4-leg fee | $10.00 fee |
| Spread / Buffer | Narrow Wing: 5 points ($95-$100) | Wide Wing: 10 points ($100-$110) | Clearing engine failed to recognize the multi-leg broken-wing structure |
| Execution / Status | Collected $1.00 net credit on entry; eliminated all downside risk below $95 | Treated the short calls and long wings as independent unhedged contracts |
| Total Cost / Result | Optimal capital efficiency with defined upside risk | Tied up 2.5x more capital due to legacy margin calculations |
How Brokers Weaponize This Term
Traditional brokerages require full collateral for broken-wing butterflies unless the client holds Tier-4 options approval, restricting retail traders from deploying asymmetric, capital-efficient hedging structures.
Broker Evaluation Matrix
Cole Approves
Tastytrade: Native multi-leg strategy pickers automatically pair and margin broken-wing butterflies based on true maximum net capital at risk.
Read Audit →Cole Flags / Avoids
Simplified Neobrokers: Restricts multi-strike asymmetric butterfly combinations, forcing users into wider symmetrical structures that carry risk on both sides.
View Trap Details →Frequently Asked Questions
Why would a trader use a broken-wing butterfly instead of a standard butterfly?
To eliminate directional risk on one side of the market by structuring the trade for a net credit, allowing the trade to be profitable even if the underlying asset moves away from the target zone.
What is the maximum risk on a broken-wing butterfly?
The maximum risk is located at the long strike on the wider wing, equal to the difference in wing widths minus the net credit received.