Skip to content

ShortGuts-Neutral Strategy

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

Explanation

Short gut is a variant of the short Strangle option strategy and is implemented by a trader when he/she sees no volatility in the market and expects the underlying to trade range bound till expiry.

This strategy is implemented by selling in-the-money calls and in-the-money puts on the same underlying stock and of the same expiration date.

The short guts is executed for net credit, which opens doors for unlimited risk in both directions but profit limited to net premium, received. This option trading strategy caries higher chance of ending up in full profit than a short strangle.

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

 

Risk:

Max Loss is realized if the underlying makes a volatile move in either direction.

Reward:

Max Profit is limited and occurs when market does make a volatile move significantly.

Construction

Sell 1 ITM Call Option

Sell1ITM Put Option

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 27/04/2023 42400.0 442.0 Sell 1
PUT 27/04/2023 43200.0 458.0 Sell 1

 

Market Expiry Payoff 1 Payoff 2 Net Premium Option PayOff At Expiry Option PayOff At 2 Days To Expire
42000.0 0.0 -1200.0 900.0 -300.0 -340.695
42100.0 0.0 -1100.0 900.0 -200.0 -266.813
42200.0 0.0 -1000.0 900.0 -100.0 -200.206
42300.0 0.0 -900.0 900.0 0.0 -141.800
42400.0 0.0 -800.0 900.0 100.0 -92.417
42500.0 -100.0 -700.0 900.0 100.0 -52.773
42600.0 -200.0 -600.0 900.0 100.0 -23.504
42700.0 -300.0 -500.0 900.0 100.0 -5.185
42800.0 -400.0 -400.0 900.0 100.0 1.662
42900.0 -500.0 -300.0 900.0 100.0 -3.404
43000.0 -600.0 -200.0 900.0 100.0 -20.677
43100.0 -700.0 -100.0 900.0 100.0 -50.219
43200.0 -800.0 0.0 900.0 100.0 -91.775
43300.0 -900.0 0.0 900.0 0.0 -144.716
43400.0 -1000.0 0.0 900.0 -100.0 -208.050
43500.0 -1100.0 0.0 900.0 -200.0 -280.477
43600.0 -1200.0 0.0 900.0 -300.0 -360.513

 

 

Payoff Chart

 

Example

The bank nifty is trading at 42750 levels and as monthly expiry comes nearer. The trader sees less volatility in Bank nifty. The trader executed short gits strategy which involves selling of 1 42400 ITM Call Option at apremium of Rs. 442 and selling 1 43200 ITM Put Option at a premium of Rs. 458. His total fund inflow in initial stage comes at Rs. 22500 (442 + 458)*25.

Scenario 1:

If at expiry, the market takes a steep fall and closes at 42000 levels, the trader will loss from put option and the losses would be equal to Rs. 8525.

Scenario 2:

If the market saw no volatility as per trader expectation and closed in the range of 2 short option. Maximum profit would be equal to the net premium received for implementing the strategy, which is Rs. 22500.

Scenario 3:

opposite to that, if the market saw a rally on the upside and closes at 43400 or beyond levels, the trader will loss from the short call option and the losses will be equal to Rs. 5200 as shown in table above.

No comment yet, add your voice below!


Add a Comment

Your email address will not be published. Required fields are marked *

F & O

    20

    Per order + Get Instant Pledge Benefits* + Zero delivery Brokerage

    10

    Per order only (No hidden charges)

    Open FREE Demat Account in less than 10 minutes (Commodity & Currency)

    20

    Per order + Get Instant Pledge Benefits* + Zero delivery Brokerage

    10

    Per order only (No hidden charges)

    Open FREE Demat Account in less than 10 minutes

    20

    Per order + Get Instant Pledge Benefits* + Zero delivery Brokerage

    10

    Per order only (No hidden charges)

    Related Posts

    Nifty breaches 23,000-mark for first time, Sensex hits new all-time high
    Just like Nifty Future, you can also find the Bank Nifty Future to trade in...
    What is Nifty Future: Lot Size & How to Trade in Nifty Futures?
    Nifty 50 is the main index of the NSE stock exchange and represents the market...
    What is Futures Trading in F&O: How it Works and Pros & Cons?
    In the financial market, you can see there is another segment apart from the cash...