Short Guts - Sell In-the-Money Strike Calls, Sell In-the-Money Strike Put.
Strategies...
- Sell lower Strike Call (ITM)
- Sell higher Strike Put (ITM) with same expiration.
- Seeking for sideways movement of the stock
- Unlimited downside risk, capped profit.
Example...
Best Buy Co., Inc.(NYSE:BBY) is traded at $18.30 on June 1, 2012. To short a Guts,
- Sell June 16, 2012 $17 Call at $1.40.
- Sell June 16, 2012 $20 Put at $2.00.
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| Short Guts |
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| Short Guts |
Advantages...
- Profit from sideways movement of the stock.
- Received options premium
Disadvantages...
- High-risk strategy
- Unlimited risk if stock moves in either direction
Maximum Profit: $1.40 + $2.00 - $3.00 = $0.40
(Call Premium + Put Premium - Different in strikes)
Maximum Loss: Uncapped
Breakeven Up: $20.00 + $3.40 - $3.00 = $20.40
(Higher Strike Price + Premium gain - Different in strike)
Breakeven Down : $17.00 - $3.40 + $3.00 = $16.60
(Lower Strike Price - Premium gain + Different in strike)
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