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.
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