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Long Guts-Neutral Strategy

High volume price breakout stocks: IRCTC, REC LTD, COAL INDIA and PFC

Explanation

A long gut is a variant of the Long Strangle option strategy and is implemented by a trader when he/she is non-directional on the movements of the underlying but at the same time is bullish on volatility. While implementing this strategy the trader expects the underlying to move in either direction with high magnitude.

If the underlying fails to show a significant move trader will lose value in this, but the option will not expire worthless. This strategy is implemented for net debit and it carries potential for unlimited profit with risk of limited loss.

This strategy involves buying one lot of In-the-Money (ITM) Call and Put Option for the same expiration, the distance should be equal between the strike price from the ATM. It is expensive to implement guts in comparison to strangle as ITM option s are bought.

The only difference between long strangle and long guts is the selection of strike. In long guts ITM options are bought while in Long strangle OTM options are bought.

 

Risk:

Max loss is realised when underlying asset price expires between the strike prices of 2 long options.

Reward:

Max. profits are achieved when the underlying asset price makes a strong move either upwards or downwards at expiration.

 

Construction

Buy 1 ITM Call Option

Buy 1 ITM Put Option

Option Type Expiry Date Strike Price LTP Action No. Of Lots
PUT 27/04/2023 17900.0 132.15 Buy 1
CALL 27/04/2023 17600.0 191.25 Buy 1

 

Market Expiry Payoff 1 Payoff 2 Net Premium Option PayOff At Expiry Option PayOff At 2 Days To Expire
17400.0 500.0 0.0 -323.4 176.6 170.516
17450.0 450.0 0.0 -323.4 126.6 125.475
17500.0 400.0 0.0 -323.4 76.6 84.832
17550.0 350.0 0.0 -323.4 26.6 50.500
17600.0 300.0 0.0 -323.4 -23.4 24.065
17650.0 250.0 50.0 -323.4 -23.4 6.369
17700.0 200.0 100.0 -323.4 -23.4 -2.539
17750.0 150.0 150.0 -323.4 -23.4 -3.084
17800.0 100.0 200.0 -323.4 -23.4 4.271
17850.0 50.0 250.0 -323.4 -23.4 19.244
17900.0 0.0 300.0 -323.4 -23.4 41.629
17950.0 0.0 350.0 -323.4 26.6 71.033
18000.0 0.0 400.0 -323.4 76.6 106.673
18050.0 0.0 450.0 -323.4 126.6 147.396
18100.0 0.0 500.0 -323.4 176.6 191.877
18150.0 0.0 550.0 -323.4 226.6 238.867
18200.0 0.0 600.0 -323.4 276.6 287.366

 

Payoff Chart

 

Example

Nifty is trading at 17800 levels and trader sees volatility in the market but is unsure, in which direction the market will move. The trader implemented long guts strategy where he bought 1 17600 ITM call option at a premium of Rs. 192 and 1 ITM 17900 put option at a premium of Rs. 132. His net fund outflow at beginning is equal to Rs. 16200 (132 + 192) * 50.

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    Scenario 1:

    If at expiry, the market takes a steep fall and closes at 17400 levels, the trader will gain from put option and gains would be equal to Rs.  8500.

    Scenario 2:

    But if the market saw no volatility and closed in the range of 2 long option. Maximum loss would be equal to the net premium paid for implementing the strategy, which is Rs. 8500.

    Scenario 3:

    on the other hand if the market saw a rally on the upside and closes at 18100 or beyond levels, the trader will gain from the long call option and the gains will be equal to Rs. 9600 as shown in table above.

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