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2017issue C0222-27

Building a staggered broken-wing butterfly book

This archive article teaches a multi-week index options book: overlapping broken-wing butterflies, planned exits well before expiration, and small reverse-Harvey wing rolls that flatten the t-plus-zero line.

  • Open weekly SPX or ES options 70 to 85 days out, plan to exit 15 to 20 days before expiration, and add a new line about every two weeks so four or five trades overlap.
  • A broken-wing put example with SPX near 2000 is long 1975, short two 1930s, and long 1875, so more risk sits below the short strikes than above them.
  • Reverse-Harvey rolls are partial and direction-dependent: an up-market roll moves wings toward the short strike for a credit, and a down-market roll adds a put debit spread.
  • Stated goals are capital preservation, one or two daily reviews, and a 7% to 15% target per trade, with the same core structure described on SPX, ES futures options, and RUT.
Entries in this reading3 entries
Current trackButterfly spread29 readingsHistorical volatility analysis61 readingsImplied volatility analysis176 readings

The road-trip book

The archive describes a road-trip trade: a longer-dated index butterfly book designed for few daily checks, staggered entries, and planned exits well before expiration.

The illustrated construction uses weekly SPX or ES options with expirations 70 to 85 days out and a planned exit 15 to 20 days before expiration.

Stated construction goals include capital preservation, one or two daily reviews, and a 7% to 15% target per trade.

The same vehicles are described on SPX, ES futures options, and RUT, with the broken-wing butterfly as the core structure.

How one broken-wing butterfly is struck

A broken-wing butterfly is an unbalanced long-short-long options structure whose wings are unequal, so risk is larger on one side of the short strikes than the other.

With SPX near 2000, an example broken-wing put butterfly is long 1975, short two 1930s, and long 1875, so the lower wing is 55 points and the upper wing is 45.

That unequal wing spacing places more risk below the short strikes than above them, which is the broken-wing characteristic of the structure.

One charted example shows an opening debit of 487 against 12,732 of margin, or about 3.8%, with debit described as under 5% of margin.

Time-diversification with staggered entries

A new position is added about every two weeks so that four or five overlapping trades are typically open at once.

Time-diversification means holding several similar trades started on different dates so risk is spread across overlapping expirations rather than one entry.

Reverse-Harvey rolls and the t-plus-zero line

An up-market reverse Harvey rolls the wings toward the short strike for a credit. A down-market reverse Harvey adds a put debit spread. Both are done as partials of the main position.

A reverse-Harvey is a partial, market-direction-dependent wing adjustment that flattens the same-day profit-and-loss line of an existing butterfly.

That same-day profile is the t-plus-zero line: the profit-and-loss of a position if the underlying moves immediately, before time decay has much effect.

Inventory after partial rolls

Inventory is the growing set of extra strikes and unequal contract counts created when wings are adjusted in pieces rather than all at once.

Rolling a cheap far long put that has collapsed toward 0.10 to 0.20 up to higher strikes can cut risk and margin substantially, often by as much as 50%, while only slightly lowering the peak of the butterfly.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
13 of 18 in the Butterfly spread track
201718-21 pp.Next on Butterfly spreadBelow-the-money butterfly spreads sized by volatility regimeRecurring large losses were attributed to short gamma and short vega while collecting time decay, which after 2008 led to a redesign that still seeks theta with sharply reduced gamma and vega.
All readings on this track · 18 readings
  1. 2003Specify a butterfly as one range procedure
  2. 2006Index volatility alignment, skews, and butterfly construction
  3. 2006Oil proxies, volatility regimes, and bounded overlays
  4. 2007Pairing a double-diagonal overlay with an income butterfly
  5. 2008Range-bound butterfly debit versus iron credit
  6. 2008Iron butterfly payoff construction in volatile crude
  7. 2010Constructing directional out-of-the-money butterfly spreads
  8. 2010Modified butterfly and calendar spreads in high-priced names
  9. 2011Broken-wing put butterfly: credit, vega, and assignment
  10. 2013A live-cattle call butterfly is a different risk object than an outright call
  11. 2017Put butterfly payoff construction from an implied move and premium
  12. 2017One-day earnings volatility, ratio spreads and butterflies
  13. 2017Building a staggered broken-wing butterfly book
  14. 2017Below-the-money butterfly spreads sized by volatility regime
  15. 2018Why day-one option risk curves misread theta, calendars, and butterflies
  16. 2019An expected-value filter for defined-risk option spreads
  17. 2019Failed breakout as a setting for an out-of-the-money put butterfly
  18. 2020Limited-risk call butterfly construction in volatile oil
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All 29 readings tagged Butterfly spread
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