Broken Wing Butterfly Strategy in Indian Markets

What a broken wing butterfly actually is

A standard long butterfly has symmetric wings: buy 1 call at 24000, sell 2 at 24200, buy 1 at 24400, both wings 200 points wide. A broken wing butterfly keeps the body in place but stretches one wing by skipping a strike: buy 1 at 24000, sell 2 at 24200, buy 1 at 24500 instead of 24400. The lower wing is now 200 points wide and the upper wing 300. That deliberate imbalance is the broken wing.

Because the far wing is cheaper, being further out of the money, you spend less to buy it. That saving can flip the trade from a net debit into a net credit, so if the position expires worthless on the safe side you still walk away with money. You get a butterfly-style payoff with no loss on one entire side of the market.

The exact legs: call version vs put version

There are two mirror-image versions. A call broken wing uses only calls, puts the wide wing on the upside, and has zero risk if the market falls. A put broken wing uses only puts, puts the wide wing on the downside, and has zero risk if the market rises. Pick the side where you most want no risk.

The risk always lives on the wide wing side, where you skipped a strike. On a call broken wing, a sharp rally past your top long call hurts you; on a put broken wing, a sharp crash past your lowest long put hurts you. You are fine being wrong on one side for free, but you keep a capped loss if you are very wrong on the other.

Fully worked Nifty example with rupee P&L

Let us trade a call broken wing butterfly on Nifty. These numbers are illustrative, meant to teach the mechanics, not a recommendation or a promise of any return. Assume Nifty spot is 24,000 with a weekly expiry a few days away and a lot size of 65.

• Buy 1x 24000 CE at Rs 240 per share (you pay 240).
• Sell 2x 24200 CE at Rs 140 per share each (you collect 280 in total).
• Buy 1x 24500 CE at Rs 25 per share (you pay 25).
• Lower wing = 200 points (24000 to 24200), upper wing = 300 points (24200 to 24500). The wings are unequal, so this is a true broken wing, skewed to the upside.

Net premium per share = collect 280, pay 240, pay 25 = +15 net credit. Times the lot size of 65, you receive Rs 1,125 into your account on entry, the hallmark of the net-credit broken wing butterfly.

At expiry, if Nifty closes at or below 24,000, every call expires worthless and you keep the Rs 1,125 credit. Your best outcome is Nifty closing exactly at 24,200, the body, where you make 215 per share, or Rs 16,125 per lot. Pain begins only on a hard rally: above 24,500 the loss is capped at Rs 6,375 per lot.

So the four key levels are max profit Rs 16,125 at 24,200, max loss Rs 6,375 above 24,500, upper breakeven 24,415, and a kept credit of Rs 1,125 at or below 24,000. The loss is the unhedged wing gap minus the credit, 85 points times 75, and is fully capped by the long 24500 call.

Bank Nifty version and how the lot size changes the rupees

The same structure works on Bank Nifty, but the rupees scale very differently because the lot size is only 30 while Bank Nifty moves in much larger point swings. Suppose Bank Nifty is at 52,000: buy 1x 52000 CE, sell 2x 52300 CE, buy 1x 52800 CE. Lower wing 300 points, upper wing 500 points, broken to the upside. A net credit of 20 points per share is only Rs 600 per lot because the multiplier is 30, not 65.

This matters for position sizing. Because Bank Nifty wings are wider in points, the maximum loss in rupees can still be large despite the small lot. Always compute the worst case in actual rupees, not points, before you trade.

When this strategy fits, and when it does not

The broken wing butterfly is at its best when you expect the index to stay roughly flat to mildly directional, drifting toward the body, with no violent move in the wide-wing direction. It thrives on time decay, so the back half of a weekly expiry is a natural window. Because you enter for a credit with no risk on one side, you do not need to be precisely right about direction; you only need to avoid the one sharp move that breaches your wide wing.

• Good fit: range-bound or slowly trending index, a few days before weekly expiry, no major event before expiry.
• Good fit: you have a mild bias and want to get paid a credit for a neutral-to-directional view with capped, known risk.
• Poor fit: just before RBI policy, the Union Budget, US Fed decisions, or major earnings, when a gap can blow through the wide wing.
• Poor fit: implied volatility extremely low, so the credit is too small to justify the wide-wing risk.
• Poor fit: illiquid far strikes where the bid-ask spread alone eats most of your credit.

Costs, brokerage, STT and how they shrink your edge

A four-leg trade is not free to put on. On Indian discount brokers, option brokerage is typically a flat Rs 20 per executed order. Four legs in and four out is eight order legs, so brokerage alone can be Rs 100 to Rs 160 round trip on one lot, on top of STT, exchange charges, SEBI turnover fees, stamp duty, and 18 percent GST.

STT on options is 0.1 percent on the sell-side premium, and crucially it is also charged on the settlement value of options that are in the money at expiry. That is why you should usually square off before expiry rather than let ITM legs settle, since an ITM leg can trigger a large STT bill that wipes out a small credit. With a credit of only Rs 1,125 per lot, even Rs 200 to Rs 400 of round-trip cost takes a meaningful bite, so size enough lots that costs stay a small fraction of your edge.

Adjustments when the trade goes against you

The most dangerous scenario is the index marching toward your wide wing, the side with the risk, which in our example means Nifty climbing past 24,500. The cleanest adjustment is often the simplest: if your stop is hit, just close the whole position and take the small defined loss. Because the loss is already capped at Rs 6,375 per lot, you are never forced into a panic and can decide calmly.

• Roll the body up: buy back the short 24200 calls and re-sell at a higher strike, shifting the butterfly toward the new price.
• Roll the wide wing: move the long 24500 call further out to widen the profit zone, accepting a slightly larger max loss.
• Convert to an iron condor: add a put credit spread on the other side if your view turns neutral.
• Close partially: take off one short call to reduce ratio risk if you fear a continued rally.
• Just exit: with risk already capped, walking away at your planned stop is often the best choice.

Whatever you choose, decide your adjustment and stop rules before you enter, not in the heat of the move, and track every adjustment in a journal so you can later see whether it helped or just added cost. Most traders find that simple discipline, taking the capped loss, beats clever rolling.

How Indian tax treats your profit and loss

Profit from trading F&O, including the broken wing butterfly, is treated as business income in India, not capital gains. This is an important distinction: the 20 percent short-term and 12.5 percent long-term (above Rs 1.25 lakh) capital gains rates apply to equity delivery and other capital assets, not to options profit. Your F&O net profit is added to your other income and taxed at your slab rate.

Because it is business income, you can also deduct trading expenses like brokerage and software, and carry forward F&O losses against future business income, subject to filing on time and any applicable audit rules. Keep clean records of every leg, cost, and adjustment; a disciplined journal makes your tax filing accurate and defensible. Always confirm current rules with a chartered accountant, as thresholds change.

A simple checklist before you place the trade

• Confirm the structure is genuinely broken: the two wings must be different widths.
• Put the wide wing on the direction you are least worried about, and confirm a net credit if you want the no-risk side.
• Calculate max profit, max loss, and breakeven in actual rupees using the correct lot size before entry.
• Check the live option chain for liquidity in all four strikes, especially the far wide-wing strike.
• Avoid entering right before a major scheduled event unless the event is your entire thesis.
• Plan your exit and stop, square off before expiry to dodge the ITM STT trap, and log it in your journal.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to NSE Option Chain, Zerodha Varsity and Investopedia. Always confirm current rules, rates and contract specifications on the official source before you trade.