A short guts options strategy sells an in-the-money (ITM) call and an in-the-money put on the same stock, with the same expiration and quantity. Because the call strike is below the stock price and the put strike is above it, you collect a large credit, but at expiration at least one option, and usually both, will be in the money. The trade profits when the stock stays between the two strikes and volatility stays low. It has limited profit and unlimited risk.
How the short guts payoff works
Let the width be the put strike minus the call strike, and the credit be the total premium received.
- Maximum profit: credit − width, earned if the stock finishes anywhere between the two strikes.
- Upper breakeven: put strike + (credit − width).
- Lower breakeven: call strike − (credit − width).
- Maximum loss: unlimited if the stock rises far above the put strike, and large if it falls far below the call strike.
For example, with a stock at $100, selling a $95 call and a $105 put might bring in a combined credit of $12.50. The width is $10, so the maximum profit is $2.50 per share if the stock ends between $95 and $105, and the breakevens are $92.50 and $107.50.
Short guts vs short strangle and short straddle
A short guts with the same strikes as a short strangle has essentially the same profit and loss at expiration: the extra premium collected on the ITM options is offset by the intrinsic value you must pay back. The short guts ties up more premium and margin and carries more early-assignment risk, because both options start in the money. A short straddle sells both options at the same strike, which gives a higher maximum profit at one price but a narrower profit zone.
When traders use a short guts
A short guts is used when you expect the stock to stay in a range and implied volatility to fall. Because the risk is unlimited, it requires margin and a high options approval level, and positions should be sized and monitored closely.
MarketXLS returns option chains and quotes in Excel, for example =QM_GetOptionChain("AAPL"), so you can price both legs and calculate the breakevens in a spreadsheet. This article is educational and not investment advice.
Use the Short Gut Excel template to model the strategy.
Read the Short Guts and Long Guts comparison guide for a fuller explanation.