Having run our options trading desk at SMB for over two years now and having traded options income strategies as a retail options trader for close to ten years I can tell you this…
The data is in and the record is clear: Income traders who control the size of their losing trades are the long term winners.
That’s because options income trades usually have very high win rates—often 60 to 80% of the time—but relatively lower levels of profit per trade than other forms of trading—such as day trading or swing trading equities.
So with such high win rates, yet such modest profits per trade, it stands to reason that controlling the size of losses in those minority of cases where these trades lose is critical to success over the long haul.
That’s why the broken wing butterfly is such a popular trade among market makers and options trading professionals in general.
The broken wing butterfly is very frequently positioned as a directional trade, with a very modest loss if the directional prediction is wrong and an excellent reward if the direction selected turns out to be correct.
Personally, I like to have a high probability to win in both directions—whether I am right, or I am wrong about direction.
The broken wing butterfly—traded at a credit—allows you to do just that—a modest, but ironically guaranteed, gain if you are wrong about direction. And a lottery ticket like gain if you are right about direction, in many cases.
Many of the traders in our SMB Options Tribe trading contest regularly place broken wing butterflies as a staple part of their monthly trading regimen. That is no surprise given the flexibility and unique nature of broken wing butterflies.
Director of Options Trading
Options risk disclosure. No relevant positions.