Guts
Description
The Guts is a simple adjustment to the Strangle, but this adjustment makes it more
expensive. Instead of buying OTM options, we buy ITM calls and puts, which cre-
ates a higher cost basis. As with the Strangle, the risk we run with a Guts is that the
breakevens can be pushed further apart than with a Straddle.
To even contemplate a Guts, the Straddle criteria must have been satisfied first.
We buy higher strike puts and lower strike calls with the same expiration date so
that we can profit from the stock soaring up or plummeting down. As with the
Strangle, each leg of the trade has limited downside (i.e., the call or put premium)
but uncapped upside.
Again the same challenges apply regarding Bid/Ask Spreads and the psychology
of the actual trade. Remember that time decay hurts long options positions because
options are like wasting assets. The closer we get to expiration, the less time value
there is in the option.
Use the Straddle rules but then make an adjustment for the Guts:
1. Instead of trading the ATM calls and puts, choose the next strike higher for the
put and the next strike lower for the call.
2. Now compare the breakeven scenarios for the Guts to the Straddle. Typically
the Guts breakevens will be slightly wider. The Guts isn’t very attractive when
compared to the Strangle, but you can always compare the two with the
Straddle, using the Analyzer.
Again, its important to follow the entry and exit rules, and psychologically speak-
ing, its another tough strategy to play after you are in. Its very easy to find reasons
to exit, even though its in reach of your Trading Plan. But you must remember that
you got in for a certain reason (or reasons), and you must stay in until one of your
other reasons compels you to exit.
P/L Profile
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