Short Guts
Description
The Short Guts is a simple adjustment to the Short Strangle that increases the net
credit. Instead of selling OTM options, we sell ITM calls and puts, which creates a
higher net credit. As with Short Straddles and Short Strangles, the risk we run with
a Short Guts is uncapped on either side.
The Short Guts is precisely the opposite of a (Long) Guts. We short ITM puts and
calls with a short time to expiration (one month or less) in order to pick up income.
Because we’re short options, time decay works for us, so we only select short-term
expiration dates. Also we’re exposed to potentially unlimited risk, which is another
reason for making this a short-term strategy. Its not one Id recommend. The addi-
tional risk you face with a Short Guts is that each of the strikes is ITM, and therefore
you could be exercised early, so stay away from this strategy!
Each leg of the trade has uncapped downside. If the stock starts going ballistic in
either direction, then your position is precarious to say the least. If the stock remains
rangebound, then we will make a limited profit.
You would never trade this strategy right before a news event like an earnings report.
You certainly wouldnt want any nasty surprises to be lurking around the corner.
P/L Profile
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