Gut Spread Strategy
A Gut Spread, also called Guts, is an options strategy involving the purchase (or sale) of two options, an ITM call and an ITM put with the same expiry. A Guts is implemented by traders when huge underlying moves are expected, without knowing the way, which could be either an upside or downside move.
The payoff of a long Guts:
Gut Spread payoff is similar to a long Strangle one, except that here, the two options bought are ITM, while in a strangle the two options purchased are OTM. Basically, it means that a long strangle will be less costly to implement than a long gut.
A gut spread is an unlimited profit and limited risk strategy that is taken when the options trader thinks that the underlying stock will experience significant volatility in the near term. Then, by definition, a long gut is a debit spread as a net debit is taken to enter the trade (buy a call and put options).
If the underlying price moves significantly, the call or put will be worth money, while the other option will incur a loss. The loss on the losing leg is capped at the amount paid at inception (the premium). The long strategy will result in a loss if the price doesn’t move significantly, or remains the same since the extrinsic value of the option will be lost. The loss may only be a partial loss, since one or both options may still be in the money and therefore have some value at expiration. However, the underlying price will need to move significantly to gain money from one of the two legs and outpace the premium paid at inception for the whole strategy.
