What is Guts Option Strategy?

• Long Guts like Strangle is a volatility strategy that aims to make money either ways from a stock/index soaring up or plummeting down. Long Guts strategy demands underlying to move significantly up i.e., this is non direction but volatility-based strategy. In other words, if the underlying fails to show a significant move trader will lose value in this, but the option will not expire worthless.

When to Execute?

• Guts is a non-directional strategy, but trade must be bullish on volatility. It is advised that Guts should be implemented when there is an event in near term, and volatility is on the lower and expected to increase or can be implemented on high Volatile underlying. Expiry should be distant to avoid exponential time decay that happens as expiration approaches.

What is the Trade?

• Under Guts we buy One lot of In-the-Money (ITM) Call and Put for the same expiration, distance should be equal between the strike price from the ATM.

Break-Even Point

• Under Guts we buy One lot of In-the-Money (ITM) Call and Put for the same expiration, distance should be equal between the strike price from the ATM. Lower Breakeven = PE - Net Premium Paid. Upper Breakeven = CE + Net Premium Paid

What will be maximum profit?

• Maximum Profit is undefined if market shows significant move above or below the upper or lower breakeven respectively.

What will be maximum loss?

• It is Net debit Strategy as you have bought both Call & Put. Maximum Loss is limited to total premium paid, If market fails to show the significant move and stays in between upper and lower breakeven.

What are the advantages?

• Being Directional Neutral, you can participate in either ways volatility jumps. . Ideal to trade Guts would be when you are expecting wider movement in stocks.

What are the disadvantages?

• Time decay is harmful to Guts. Time day accelerates exponentially in the last week of expiry. It's expensive to build Guts as we are long on both ITM strikes which have higher premiums.

Example of Guts:

• Nifty future price is 15500. Guts can be devised by Adding one lot of 15200 CE @ 355 and one lot of 15800 PE at Rs. 345. Net Premium Paid = Rs.700. Undefined profit potential if stock moves above or below the upper or lower breakeven i.e., 15900 and 15100. Max Loss if underlying closes at between 15100-15900.