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Short Guts Option Strategy

Short Guts Option Strategy

What is Short Guts Option Strategy?

  • Short Guts like Short Strangle is a range bound Strategy that aims to make money wherein you don't expect any movement in stock or fall in volatility. Short Guts strategy demands underlying not to move significantly i.e., this is non direction strategy. In other words, if the underlying fails to show a significant move trader will gain the time value in this, as the option will expire with only intrinsic value.

When to Execute?

  • Short Guts is a non-directional strategy, but trade must also be bearish on volatility. It is advised that Short Guts should be implemented when there is no event in near term, and volatility is on the higher and expected to decrease or can be implemented on low Volatile underlying. Expiry should be nearest to gain from time decay that happens highest in near term expiry.

What is the Trade?

  • Under Short Guts we buy Sell 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

  • Short Guts will have 2 break-even points. The breakeven points can be calculated as given below. Lower Breakeven = PE - Net Premium Received. Upper Breakeven = CE + Net Premium Received.

What will be maximum profit?

  • Maximum Profit is defined if market doesn’t show significant move above or below the strike sold.

What will be maximum loss?

  • It is a Net credit strategy as we have sold both Call & Put. Maximum Loss is undefined If market shows the significant move and stays in above upper and lower breakeven.

What are the advantages?

  • Profit from Range bound stock. High yielding income strategy. High premium for both options is ITM. Time decay is beneficial to Short Guts. Time day accelerates exponentially in last week of expiry.

What are the disadvantages?

  • Uncapped Risk on either side. Hedging cost would be high if stock gives any directional movement.

Example for Short Guts

  • For example – Nifty future price is 15500. Short Guts can be devised by selling one lot of 15200 CE @ 255.00 and one lot of 15800 PE at Rs. 265.00. Net Premium Received = Rs.520. Undefined loss potential if stock moves above or below the upper or lower breakeven i.e., 15720 and 15280. Max Profit if underlying closes between 15200-15800.