A type of broken wing butterflyA butterfly which can be either call or put whose strikes are not equidistant. In a regular butterfly there is equal distance from the long strike (wing) to the short strikes (body) and from the body to the other wing. Think of al butterflies as simply two verticals, one long and one short. The broken wing butterfly simply has the short vertical being wider than the long vertical. In exchange for some directional risk, the spread is opened for a lower price, often even a credit. that has a wider long vertical than its short vertical. In a traditional BWBAn abbreviation for Broken Wing Butterfly, the long vertical is more narrow than the short vertical which can allow the spread to be placed for less debit or even a credit.
The reverse mullet always trades for a debit to open as the long vertical is wider than the short. For purposes of illustration, understand that a butterfly (of any type) is always just a combination of long verticals and short verticals that have the same short strike.
Examples: (Assume all strikes are calls)
Traditional BWBAn abbreviation for Broken Wing Butterfly
+1 4000
-2 3985
+1 3980
This would trade for a credit as the 3980/3985 long vertical is narrower than the 3985/4000 vertical. It would also have upside risk, delivering a loss of $10 per contract if all strikes expired fully ITM.
Reverse Mullet
+1 4000
-2 3995
+1 3980
This would trade for a debit as the 3980/3995 vertical is wider than the 3995/4000 vertical. It would have no upside risk but rather would deliver a gain of $10 per contract if all strikes expired fully ITM.
We call it the reverse mullet because a mullet haircut is said to be “business in the front, party in the back”. This spread is the reverse of that since the part that makes you money (party) is in the front and the part that caps off the risk (business) is in the back.
