Short Guts is a strategy wherein the investor simultaneously buys an In-The-Money Call and an In-The-Money Put of the same underlying security and same expiry.
When to use this strategy?
This strategy is used when the investor is neutral but expects the price of the underlying security to either rise sharply or fall sharply by expiry.
How to build this strategy?
This strategy has two legs:
Leg 1 – Buy 1 ITM Call
Leg 2 – Buy 1 ITM Put
Credit Spread/Debit Spread
This is a Debit Spread Strategy.
The strategy has unlimited profit potential.
When is this strategy profitable?
The investor can earn large profits if the price of the underlying security either rises significantly above the strike price of the call option purchased or falls significantly below the strike price of the put option purchased.
The investor faces limited risk in this strategy.
When is this strategy unprofitable?
The investor stands to make a loss if the price of the underlying security neither rises, nor falls.