If you are an options trader, you might have heard of the broken wing butterfly option strategy. It is a net credit, high probability trade that can make money even if your speculation is directionally wrong.
This strategy is slightly more directional than a standard long butterfly spread and carries defined risk on one side of the market when routed for a credit.
In this blog post, we will discuss the broken wing butterfly option strategy in ICICIBANK for August Expiry. We will cover the typical setup of a broken wing butterfly, how to route this trade for credit, and how to manage it for profitability.
Before we move to our strategy let me share that i have divided this blog post into 2 sections. in first section we will lean what a broken wing butterfly is and in the next section i will share the broken wing butterfly in ICICIBANK.
We will also discuss the potential profit and risk associated with this strategy. So, let's dive in and explore the broken wing butterfly option strategy in detail.
What is a broken wing butterfly option strategy?
The stock market has been volatile in recent months, making it difficult for traders to make profits. One option strategy that can be used in a volatile market is the bullish broken wing butterfly. This strategy is a variation of the traditional butterfly spread, and it can be used to profit from a stock that is expected to trade within a narrow range.
How does the broken wing butterfly option strategy work?
The bullish broken wing butterfly involves buying one call option at the lower strike price, selling two call options at the middle strike price, and buying one call option at the higher strike price but a little closer compare to the previously bought call.
For example, if you are bullish on ICICIBANK stock and you think it will trade between 700 and 750 in the next few weeks, you could use the following bullish broken wing butterfly strategy:
- Buy 1 ICICIBANK call option with a strike price of 650.
- Sell 2 ICICIBANK call options with a strike price of 700.
- Buy 1 ICICIBANK call option with a strike price of 720.
You can see the difference between the higher bought call and short call is less compared to the difference between lower bought call and short calls.
The total cost of this strategy would be the premium paid for the 650 call option minus the proceeds from selling the 700 call options. If ICICIBANK stock trades between 650 and 750 at expiration, the options will expire worthless and you will keep the entire premium that you received as net credit.
The risk and reward
The risk of the bullish broken wing butterfly is limited to the premium that you paid for the 650 call option. The reward is limited to the difference between the premiums of the 700 and 720 call options. For example, if the premiums for the 650, 700, and 720 call options are 20, 10, and 5, respectively, then your maximum loss would be 20 and your maximum profit would be 30.
The best time to use this strategy
The bullish broken wing butterfly strategy is best used in a volatile market when you are bullish on a stock but you are not sure how much it will move. Bearish strategy can also be used to hedge against losses if you are already long a stock and you are worried about a decline in the market.
The broken wing butterfly is a versatile option strategy that can be used to profit from a stock that is expected to trade within a narrow range. This strategy is relatively low-risk and can be used in both bullish and bearish markets. If you are looking for a way to reduce your risk and increase your potential profits, the broken wing butterfly is a strategy worth considering.
Now lets move to the next section where I will share why I choose ICICIBANK for this strategy and how I optimise it to increase overall return.
Bullish Broken Wing Butterfly Strategy in ICICIBANK
For bullish strategy, our first step is to find a stock with bullish trend. Now lets looks at the chart of ICICIBANK:
If you look at the chart you will find that after a successful breakout from 960, there was some profit booking that helps ICICIBANK retrace back to 960 again and now we can see fresh buying is coming near 960.
So here 960 is acting as immediate support levels and we may expect some more upside levels till 1010. Breakout from 1010 will trigger a fresh buy signal but till ICICIBANK is trading between 960 - 1010, we can say it is trading in a range with mild bullish trend.
This is the ideal setup for a bullish broken wing butterfly. In this setup I prefer to trade with collar option strategy too but only if trend is highly bullish.
Because trend is mild bullish here, so I have choose a bullish broken wing butterfly for ICICIBANK.
One more thing: I don't rely only on price action. I need a confirmation from OI data too.
so lets look at OI chart of ICICIBANK:
Now if look at the oi chart, you can see that highest OI is at 950 PE & 1000 CE. These two levels are acting as immediate support and resistance respectively. So can we expect that ICICIBANK will remain in the same range?
One more thing you should not miss here is that there is short covering on the call side from 960 to 1020. Means?
People are shifting there calls to higher levels because they thing that ICICIBANK will go higher from here.
I talk more about how to interpret this OI data to find high probability trading opportunities in Intraday as well as positional in my mentorship program.
So we can say that trend is mild bullish while having a range of 950 - 1000. This is what we are following for our Bullish Broken Wing Butterfly Option Strategy.
Bullish Broken Wing Butterfly Option Strategy in ICICIBANK
I hope now you have understand why i choose ICICIBANK for Bullish Broken Wing Butterfly Option Strategy. Now let me share the strategy.
I have created this strategy while keeping 960 - 1000 range and bullish trend in my mind.
We will make good money in two conditions. Either ICICIBANK must remain in the range of 960 - 1000 or we will see bullish movement in it.
Losses will only be on the downside. For that I'm keeping 950 as stoploss. I will do certain adjustment after a breakdown from 950.
Adjustment in Bullish Broken Wing Butterfly Option Strategy
To adjust this Bullish Broken Wing Butterfly Option Strategy, You can follow 950 as stoploss.
If there a breakdown from 950, you can book profit in sold call and bring it one strike above the lower bought strike.
This advanced strategy along with other monthly income strategies is part of our Option Strategies: A Mentorship Program. If you want to learn how one can make passive income through option strategies, must enroll in this unique program.
There are some more adjustments that I will share the adjustments in my premium telegram channel also. To get access to that telegram channel,you can join the mentorship program.
In case if you have any query related to this strategy, can type it in the comment box.
Thank you for reading this post. Have a profitable trading!
DISCLAIMER: We are not SEBI research analysts. Views and trading strategies are posted in this weekly market newsletter only for educational purposes. There is no liability whatsoever for any loss arising from the use of this product or its contents. This product is not a recommendation to buy or sell, but rather a guideline for interpreting specified analysis methods. This information should only be used by investors and traders aware of the risk inherent in securities trading.