A skip-strike butterfly (also called a broken-wing butterfly or gap butterfly) is a modified butterfly spread where one of the wings is placed further from the body than the other, creating an asymmetric structure. Unlike a standard butterfly where the wings are equidistant, the skip-strike version has a 'gap' in the strike ladder—you skip one available strike for one of the wings.
The most common use of a skip-strike butterfly is to generate a credit at entry instead of paying a debit. By widening one wing relative to the other, the two sold middle-strike options generate enough premium to more than offset the cost of both long wing options. The result is a net credit trade with a profit tent centered on the short strikes and a defined loss on the wider wing side.
A typical skip-strike put butterfly might buy a $105 put, sell two $100 puts, and skip the $95 strike to buy a $90 put instead of $95. The wider lower wing ($90 vs. $95 in a standard butterfly) costs slightly more, but the two sold $100 puts generate more premium, creating a net credit. The maximum profit is achieved if the stock closes at $100, and the position profits from any outcome above $105 (the credit received).
A skip-strike butterfly call mirrors the same structure on the upside: buy 1 lower-strike call, sell 2 middle-strike calls, and skip a strike on the upper wing by buying a further OTM call instead of the adjacent one. For example, buy a $95 call, sell two $100 calls, and skip the $105 strike to buy a $110 call instead of $105. The wider upper wing costs more, but the extra premium from the two short $100 calls still produces a net credit, with maximum profit at $100.
The directional bias in a skip-strike butterfly is the key feature. By choosing which side to widen, you implicitly bet on the stock not making a large move in that direction. Skip-strike put butterflies are mildly bullish (the wide put wing means you lose if the stock falls dramatically below the lower strike). Skip-strike call butterflies are mildly bearish (the wide call wing means you lose if the stock rallies dramatically above the upper strike).
An inverse (or reverse) skip-strike butterfly flips every leg of the standard structure: instead of buying the near and skipped wings and selling the body, you sell the near and skipped wings and buy the two middle-strike options. This turns the trade from a net credit into a net debit, and flips the risk profile from short-volatility to long-volatility. Where a standard skip-strike butterfly wants the stock to pin near the body and profits from time decay, an inverse skip-strike butterfly (put or call) wants the stock to move sharply away from the body toward the skipped wing—the wider wing provides extra profit potential on a large move, while the debit paid defines and caps the maximum loss if the stock pins instead.
Management of skip-strike butterflies follows the same principles as broken-wing butterflies: monitor the gap risk side (the wider wing direction) and adjust if the stock approaches that level. The credit entry gives you a margin of safety, but a strong directional move against the structure can produce losses exceeding the initial credit. Inverse skip-strike butterflies are managed the opposite way—the debit paid is the hard cap on loss, so management is mainly about deciding whether to hold for the large move or exit early if the thesis stops playing out.