Investment Type: Debit
Strike Prices: ITM for both legs
Expiration Month: Current month for both legs (less than 30 days)
Composition: Sell Call + Sell Put

 
  Short Guts Profile Chart  
 

 
Description:

 

Short Guts is the opposite of Long Guts and it’s a Short Straddle with ITM options. We choose higher strike for Put and lower strike for Calls. Even though this strategy has a better breakeven point than Short Straddle, but the reward is smaller as well.

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  Example  
 

 

Entry:


Maximum Initial Investment = $5,000 (or based on 5% money management rule)

 

Stock Price :
$34.00
   
Buy/Sell :
Sell
    
Strike Price :
32.5 Call
 } Premium: $2.15
Expiration Date :
December
No of Contracts :
13
    

 

Stock Price :
$34.00
   
Buy/Sell :
Sell
    
Strike Price :
35 Put
 } Premium: $1.70
Expiration Date :
December
No of Contracts :
13
    

 

Investment @ Entry = (Premium of Call Leg x No of Contracts x 100 Shares) + (Premium of Put Leg x No of Contracts x 100 Shares) = ($2,795) + ($2,210) = Credit ($5,005)

 

Breakeven Point Down = Strike Price – Net Credit = $35.00 - $3.85 = $31.15
Breakeven Point Up = Strike Price + Net Credit = $35.00 + $3.85 = $38.85

 

Exit:

 

Best Case Scenario:

Stock Price :

 $35.00 up $1.00

    
Buy/Sell :

Sell

 } Premium: $2.50
Strike Price :

32.5 Call
Expiration Date :

December

 

Stock Price :

$35.00 up $1.00

    
Buy/Sell :

Sell

 } Premium: $0.00
Strike Price :

35 Put
Expiration Date :

December

 

Profit @ Exit = (Premium of Call Leg x No of Contracts x 100 Shares) + (Premium of Put Leg x No of Contracts x 100 Shares) – Investment @ Entry = ($3,250) + $0 – ($5,005) = $1,755


Return of Investment = Profit @ Exit / Investment @ Entry = 100%

 

Worst Case Scenario : Unlimited Loss

 

Stock Price
Profit/Loss
ROI
27.50

-4745

-95%
30.00

-1495

-30%
32.50

1755

35%
35.00

1755

35%
37.50

-1495

-30%
40.00

-4745

-95%