Short BWB (Hedged Credit)#
The “Credit Spread Alternative” - Directional credit with crash protection.
Overview#
| Attribute | Value |
|---|---|
| Environment | Negative Gamma (Trend) |
| Market Dynamic | Fear of Reversal |
| Volatility | Any |
| Primary Goal | Tail Defense - Credit spread with “Crash Protection” |
| Profit Target | Keep the credit |
| Max Loss | Significantly reduced vs standard credit spread |
Do NOT use in Positive Gamma. Pin risk at the Long Strike becomes your max loss. This is specifically for Negative Gamma environments where you fear a tail event.
Structure#
Short Butterfly (Sell 1 / Buy 2 / Sell 1)
This is essentially:
- Standard Credit Spread
- PLUS a Debit Spread Hedge (the “crash protection”)
Example (Bearish):
- Sell 1x 6100 Call
- Buy 2x 6110 Calls
- Sell 1x 6120 Call
Entry Criteria#
- Negative Gamma environment confirmed
- Directional view but fear of reversal/tail event
- Prefer over standard credit spread when tail risk is elevated
- Enter for a net credit
Exit Rules#
Profit Target#
- Keep the credit if directional view is correct
Stop Loss#
- Max loss is significantly reduced compared to a standard vertical spread
- The hedge kicks in on a tail event
Management#
The 3-leg structure provides automatic crash protection. No manual hedging required.
Why NOT in Positive Gamma? In a pinning environment, price can stick at your long strike - which is your max loss point. Only use Short BWB when you expect trending/explosive moves (Negative Gamma).