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  • user warning: Table './mysmp_drupal/cache_filter' is marked as crashed and should be repaired query: UPDATE cache_filter SET data = '<h2>Long Guts - Overview</h2><p>The <strong>long guts</strong> option strategy is a <a href=\"/options/implied-volatility.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #800080;\">volatility</span></span></a> trade that is created when the trader believes that there will be a sharp move up, or down in the <a href=\"/options/underlying-security.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #800080;\">underlying</span></span></a>.&nbsp; This <a href=\"/options/options-strategies\"><span style=\"text-decoration: underline;\"><span style=\"color: #0066cc;\">options strategy</span></span></a> involves buying an equal amount of ITM <a href=\"/options/call-options.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #800080;\">calls</span></span></a> and <a href=\"/options/put-option.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #0066cc;\">puts</span></span></a>, which have the same <a href=\"/options/options-expiration-week.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #800080;\">expiration date</span></span></a>.&nbsp; This strategy is a limited risk, unlimited return, direction neutral strategy requiring a net debit to initiate the position.&nbsp; The long guts is very similar to the <a href=\"/options/straddle.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #800080;\">straddle</span></span></a> and <a href=\"/options/strangle.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #0066cc;\">strangle</span></span></a>; however, it uses <a href=\"/options/options-moneyness.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #800080;\">in the money</span></span></a> options instead.</p><p>This strategy is usually used by traders who not sure as the direction of the underlying but are sure about future volatility in it.&nbsp; Many times, traders use this to profit off of earnings releases or other market moving items such as a move in the <a href=\"/bonds/federal-funds-rate.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #800080;\">federal funds rate</span></span></a> by the <a href=\"/bonds/federal-reserve-bank.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #800080;\">fed</span></span></a>.</p><h2>Long Guts Risk Characteristics</h2><p>In reviewing the risk characteristics of the long guts strategy, you can see that the price zone between the two option <a href=\"/options/strike-price.html\"><span style=\"text-decoration: underline;\"><span style=\"color: #0066cc;\">strike prices</span></span></a> is where you will lose the most amount of money.&nbsp; Once you break further away from the strikes, profits will start to be realized.</p><p><img src=\"/files/u1/long-guts-risk-characteristics.png\" alt=\"Long Guts Options Strategy Risk Characteristics\" width=\"391\" height=\"373\" /></p><h2>Breakevens &amp; Profit Potential</h2><p>The breakeven calculations are pretty straight forward for the long guts.</p><p><strong>Transaction Cost</strong> = Long Put Premium + Long Call Premium</p><p>Once we have the transaction cost for this trade, we can add it to the long call strike and subtract it from the long put price to arrive at our breakevens.</p><h3><strong>Breakeven Calculations</strong></h3><p><strong>b1*</strong> = Long Put Strike - Transaction Cost</p><p><strong>b2*</strong> = Long Call Strike + Transaction Cost</p><h3><strong>Risk Calculations</strong></h3><p>The maximum loss always occurs between the long call and long put strike price, you can see that in our risk characteristics but we will walk through why in our example below.&nbsp; It can be calculated with the following formula:</p><p><strong>Maximum Loss Potential</strong> = (Long Put Strike - Long Call Strike) - Transaction Cost</p><h3><strong>Profit Calculations</strong></h3><p>Once the underlying moves past these breakeven prices, the strategy will return dollar for dollar on any move up or down.</p><p><strong>Profit When Underlying is above b1*</strong> = Underlying Price at Expiration - Long Call Strike - Transaction Cost</p><p><strong>Profit When Underlying is below b2*</strong> = Long Put Strike Price - Underlying Price at Expiration - Transaction Cost</p><p>The spreadsheet below will take care of all of these calculations for you.&nbsp; You may modify the values in the highlighted cells in order to represent your options.&nbsp; The breakeven, risk, and profit calculations will all be updated for you.</p><p>&nbsp;</p><p>&nbsp;</p>', created = 1566592099, expire = 1566678499, headers = '', serialized = 0 WHERE cid = '1:3245ecc6a2893fd8e6582b1cfdf0a84e' in /var/www/html/mysmp/includes/cache.inc on line 109.
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Long Guts

Long Guts - Overview

The long guts option strategy is a volatility trade that is created when the trader believes that there will be a sharp move up, or down in the underlying.  This options strategy involves buying an equal amount of ITM calls and puts, which have the same expiration date.  This strategy is a limited risk, unlimited return, direction neutral strategy requiring a net debit to initiate the position.  The long guts is very similar to the straddle and strangle; however, it uses in the money options instead.

This strategy is usually used by traders who not sure as the direction of the underlying but are sure about future volatility in it.  Many times, traders use this to profit off of earnings releases or other market moving items such as a move in the federal funds rate by the fed.

Long Guts Risk Characteristics

In reviewing the risk characteristics of the long guts strategy, you can see that the price zone between the two option strike prices is where you will lose the most amount of money.  Once you break further away from the strikes, profits will start to be realized.

Long Guts Options Strategy Risk Characteristics

Breakevens & Profit Potential

The breakeven calculations are pretty straight forward for the long guts.

Transaction Cost = Long Put Premium + Long Call Premium

Once we have the transaction cost for this trade, we can add it to the long call strike and subtract it from the long put price to arrive at our breakevens.

Breakeven Calculations

b1* = Long Put Strike - Transaction Cost

b2* = Long Call Strike + Transaction Cost

Risk Calculations

The maximum loss always occurs between the long call and long put strike price, you can see that in our risk characteristics but we will walk through why in our example below.  It can be calculated with the following formula:

Maximum Loss Potential = (Long Put Strike - Long Call Strike) - Transaction Cost

Profit Calculations

Once the underlying moves past these breakeven prices, the strategy will return dollar for dollar on any move up or down.

Profit When Underlying is above b1* = Underlying Price at Expiration - Long Call Strike - Transaction Cost

Profit When Underlying is below b2* = Long Put Strike Price - Underlying Price at Expiration - Transaction Cost

The spreadsheet below will take care of all of these calculations for you.  You may modify the values in the highlighted cells in order to represent your options.  The breakeven, risk, and profit calculations will all be updated for you.

 

 

Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

Tradingsim.com
Day Trading Simulator

Tradingsim.com provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for...

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