Guts Option Strategy

What are the characteristics of this option strategy?

The Guts option strategy is a bullish-neutral strategy that takes advantage of time decay and the reduced up-front cost of the stock. It involves selling a lower strike price call and buying a higher strike price call (called a “guts spread”) for the same expiration date. The investor’s profit potential is limited to the difference in strike prices, but their upside is unlimited. It is a relatively low-risk, low-reward strategy that is suitable for beginner to intermediate option traders.

Is this a bullish, bearish or neutral strategy?

The Guts option strategy is a bullish-neutral strategy, meaning that investors make money if the underlying stock remains above the lower strike price.

Is this a beginner or an advanced option strategy?

This is an intermediate option strategy, as it requires some understanding of option pricing and risk management. The investor must understand option pricing, the “Greeks” (delta, theta, gamma and vega), volatility, and the risks associated with trading options.

In what situation will I use this strategy?

This strategy is best used in situations where the investor expects the underlying stock to move up, but not enough to exceed the higher strike price. It is used as a means to establish a low-cost long position in a stock, while limiting the maximum risk and loss.

Where does this strategy typically fall in the range of risk-reward and probability of profit?

The Guts option strategy typically falls towards the lower end of the risk-reward spectrum, with a lower potential reward and a higher probability of profit than other more aggressive option strategies.

How is this strategy affected by the greeks?

The Guts option strategy is primarily affected by delta (the rate of change in the price of the option relative to changes in the underlying stock) and theta (the rate of change in the price of the option relative to changes in time to expiration). As such, it is important to select an option with a delta that is close to neutral (around 0.50).

In what volatility regime (i.e VIX level) would this strategy be optimal?

This strategy is most optimal when the market is in a low volatility state (i.e. when the VIX is below 20). This is because theta decay accelerates in low volatility environments, making it easier for the investor to profit from time decay.

How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?

When the trade goes against the investor, they can adjust the Guts option strategy by exiting the trade or rolling it out to a later expiration date. This strategy is relatively easy to adjust and manage, but it is still necessary for the investor to understand the effect of the greeks in order to make the most optimal trade adjustments.

Where does this strategy typically fall in the range of commissions and fees?

The Guts option strategy typically falls towards the lower end of the range of commissions and fees due to the limited up-front cost of the option.

Is this a good option income strategy?

Yes, the Guts option strategy can be used as a good option income strategy. It allows the investor to establish a low-cost long position in a stock while limiting their risk, and to profit from time decay and the fluctuations in the underlying stock.

How do I know when to exit this strategy?

The investor should exit the strategy when the underlying stock reaches the lower strike price of the trade. At this point, the investor’s maximum profits will have been realized and the risk of losses is increased. The investor can also exit the trade prior to expiration if the market conditions change significantly and the risk of loss is too great.

How will market makers respond to this trade being opened?

Market makers may respond to this trade by laying off some of the risk associated with the spread. This may be done through options trading, where the market maker sells options contracts to offset their risk from the spread.

What is an example (with calculations) of this strategy?

Here’s an example of the Guts Option Strategy using the stock MSFT, which is trading at $285:

Sell 1 MSFT call option with a strike price of $275 for a premium of $12.00
Buy 1 MSFT call option with a strike price of $295 for a premium of $4.00
The total credit received for this trade is $8.00, which is the maximum potential profit for the strategy. The maximum potential loss is unlimited if MSFT’s price rises above the strike price of the higher call option.

If MSFT’s price stays within the range of $275 and $295, both options will expire worthless, and we will keep the full credit received. However, if MSFT’s price rises above $295, the higher call option will be in the money, and we will start losing money. On the other hand, if MSFT’s price falls below $275, the lower call option will expire worthless, and we will keep the full credit received.

MarketXLS

MarketXLS is a powerful Excel add-in that helps investors and traders analyze and trade stocks, ETFs and options more efficiently. It helps investors compare different options strategies, calculate the values of options and implied volatilities, and to adjust strategies when the market moves against their positions. MarketXLS also provides risk management tools and analytics to help investors optimize their profits and manage their risks. With the easy-to-use tools and the powerful analytics provided by MarketXLS, investors can quickly and easily analyze and trade options.

Here are some templates that you can use to create your own models

Short Gut
Long Gut
Covered Call Option Strategy
Covered Put
Strike Arbitrage
Covered Put
Christmas Tree Spread With Puts Option Strategy
Christmas Tree Spread With Puts Option Strategy
Long Calendar Spread With Puts Option Strategy
Diagonal Spread with Puts Option Strategy
Long Butterfly with Puts Option Strategy
Long Calendar Spread with Puts Option Strategy
Synthetic Long Stock Option Strategy
Iron Condor Option Strategy
Synthetic Short Straddle with Puts
Butterfly for Shorts Spread
Short Butterfly Spread
Put-Call Parity Arbitrage

Search for all Templates here: https://marketxls.com/templates/

Relevant blogs that you can read to learn more about the topic

Short Guts & Long Guts Option Strategy
Short Guts Options Strategy
Mastering the Art of Shorting Call Options
Long Guts Options Strategy
The Benefits of Using Call Credit Spreads for Trading