Outlook: Neutral
Guts - Buy In-the-Money Strike Calls, Buy In-the-Money Strike Put.
- An adjustment strategy to Strangle
Strategies...
- Buy lower Strike Calls (ITM)
- Buy higher Strike Put (ITM) with same expiration.
- Seeking for high volatility stock (trade before announcment of earning reports or new event)
- Make profit with stock soaring up or plummeting down.
- Limited downside risk, uncapped upside potential profit.
Exxon Mobil Corporation(NYSE:XOM) is traded at $78.50 on June, 2012. To do a Guts, you
- Buy Oct 2012 $75 Calls at $6.50.
- Buy Oct 2012 $80 Puts at $5.20.
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| Long Guts |
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| Long Guts |
Advantages...
- Profit from volatile stock's movement.
- Uncapped potential profit
Disadvantages...
- Very expensive - ITM Options are much more expensive than ATM options
- Significant movement of stock to cover all costs.
- Time decay accelerates as options close to expiration.
Maximum Profit: Uncapped Profit
Maximum Loss: $6.50 + $5.20 - $5 = $6.70
(Premium Paid - Different in strike)
Breakeven Up: $80 + ($11.70 - $5) = $86.70
[Higher Strike + (Premium Paid - different in strike)]
Breakeven Down: $75 - ($11.7 - $5) = $68.30
[Lower Strike - (Premium Paid - different in strike)]
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