The Guts Strangle is a lesser-known options strategy that flips the traditional strangle on its head. Instead of using out-of-the-money options, a guts strangle uses in-the-money options - buying an ITM call and an ITM put. This creates a position with different Greeks, different risk characteristics, and some unique advantages for certain market conditions. This guide will explain everything you need to know about guts strangles and when to use them.
What is a Guts Strangle?
A Guts Strangle consists of buying an in-the-money call and buying an in-the-money put on the same underlying with the same expiration. Unlike a regular strangle where both options are OTM, both options in a guts strangle have intrinsic value from the start.
The guts difference: A traditional strangle has the call strike above the current price and the put strike below. A guts strangle reverses this - the call strike is below the current price (ITM) and the put strike is above the current price (ITM). Both options are already "in the money."
Guts Strangle Structure
The basic guts strangle has two legs:
- Buy 1 in-the-money call: Strike below current stock price
- Buy 1 in-the-money put: Strike above current stock price
Guts Strangle Example
Stock XYZ is trading at $100.
- Buy 1x $95 call (ITM by $5): $7.00
- Buy 1x $105 put (ITM by $5): $7.00
Total cost: $14.00 ($1,400 per strangle)
Intrinsic value already: $5 (call) + $5 (put) = $10
Extrinsic value paid: $14 - $10 = $4
Comparing Guts to Traditional Strangle
Using the same stock at $100, let us compare:
| Feature | Traditional Strangle | Guts Strangle |
|---|---|---|
| Call strike | $105 (OTM) | $95 (ITM) |
| Put strike | $95 (OTM) | $105 (ITM) |
| Typical cost | $4.00 | $14.00 |
| Intrinsic value | $0 | $10.00 |
| Max loss | $4.00 (full premium) | $4.00 (extrinsic only) |
Key Insight
Both strategies have the same breakeven points and the same maximum loss (the extrinsic value paid). The difference is in how much capital you deploy and how the position responds to changes in volatility and time.
Profit and Loss Analysis
Using our $95 call / $105 put guts strangle:
Maximum Loss
- Occurs when stock is between $95 and $105 at expiration
- At $100: Call worth $5, Put worth $5, Total = $10
- Loss: $14 - $10 = $4 ($400 per strangle)
- This is the extrinsic value you paid
Breakeven Points
- Upper breakeven: $105 + $4 = $109
- Lower breakeven: $95 - $4 = $91
- Stock must move beyond $91 or $109 to profit
Profit Potential
- At $120: Call = $25, Put = $0, Total = $25, Profit = $11
- At $80: Call = $0, Put = $25, Total = $25, Profit = $11
- Unlimited profit potential in either direction
Same P/L as traditional strangle: Mathematically, a guts strangle and a traditional strangle with strikes equidistant from the stock price have identical profit/loss profiles at expiration. The difference lies in the Greeks and early exercise considerations.
Why Use a Guts Strangle?
If the P/L is the same, why bother with guts? Several reasons:
1. Lower Vega Exposure
ITM options have lower vega than OTM options. This means:
- Less sensitive to implied volatility changes
- Better for capturing actual price moves vs IV moves
- More stable position value day-to-day
2. Less Theta Decay
ITM options have more intrinsic value and less extrinsic value:
- Only the extrinsic portion decays with time
- Position loses value more slowly
- Better for longer holding periods
3. Dividend Considerations
ITM calls may be exercised early for dividends:
- This can work for or against you
- Must be aware of ex-dividend dates
4. Psychological Comfort
Some traders prefer ITM options because:
- The position always has significant value
- Feels less like a "lottery ticket"
- Easier to close for meaningful proceeds if wrong
Short Guts Strangle
You can also sell a guts strangle to collect premium:
Short Guts Strangle Setup
Stock XYZ at $100. You expect low volatility.
- Sell 1x $95 call: $7.00
- Sell 1x $105 put: $7.00
Total credit: $14.00
Maximum profit: $4.00 (extrinsic value)
Maximum loss: Unlimited in either direction
The short guts strangle profits when the stock stays between your strikes, similar to a short strangle but requiring more margin due to the ITM options.
When to Use Guts Strangles
Long Guts (Buying)
- Expecting a big move: You think the stock will move significantly
- Want to reduce IV exposure: You want to bet on price, not volatility
- Longer holding period: Less theta decay is beneficial
- High current IV: When IV is elevated, ITM options are relatively cheaper
Short Guts (Selling)
- Expecting low volatility: Stock will stay in a range
- Want to collect premium: Similar to short strangle with different margin
- High IV environment: Collect more extrinsic value when IV is elevated
Greeks of the Guts Strangle
Understanding the Greeks helps manage the position:
Delta
ITM call has high positive delta, ITM put has high negative delta. Combined, the position is approximately delta neutral, similar to a traditional strangle.
Gamma
Lower than OTM options. The position responds more linearly to price changes.
Theta
Lower than traditional strangle because less extrinsic value is at stake.
Vega
Significantly lower than traditional strangle. Less sensitive to IV changes.
Managing Guts Strangle Positions
Taking Profits
- Set a profit target (e.g., 50% of maximum potential)
- Close when the stock has moved significantly
- Consider closing one leg if you have a directional view
Cutting Losses
- Set a maximum loss threshold (e.g., 50% of extrinsic paid)
- Close if the stock is stuck in the loss zone with little time left
- Roll to a later expiration if you still expect a move
Early Exercise Risk
ITM options may be exercised early:
- Monitor for dividends on the call side
- Monitor for deep ITM puts that may be exercised for interest
- Close positions before ex-dividend dates if concerned
Position Management Example
You bought the $95c/$105p guts strangle for $14. Stock moves to $112.
- $95 call now worth: $17.50
- $105 put now worth: $0.50
- Total value: $18.00
- Profit: $4.00 ($400)
Decision: Close for $400 profit (100% of max loss) or hold for more upside.
Guts Strangle vs Straddle
| Feature | Straddle | Guts Strangle |
|---|---|---|
| Strikes | Same strike (ATM) | Different strikes (both ITM) |
| Intrinsic value | None | Significant |
| Breakeven range | Narrower | Wider |
| Cost | High (all extrinsic) | Higher (includes intrinsic) |
Tips for Success
- Compare to traditional strangle: Calculate the extrinsic paid vs a regular strangle
- Use when IV is high: ITM options are relatively cheaper in high IV
- Watch for early exercise: Be aware of dividend dates and deep ITM scenarios
- Consider margin impact: Short guts require significant margin
- Focus on the extrinsic: That is your true risk - the intrinsic is already "yours"
- Use liquid options: ITM options can have wider spreads
Track Your Guts Strangle Positions
Pro Trader Dashboard automatically calculates your Greeks, tracks intrinsic vs extrinsic value, and monitors your strangle positions in real-time.
Summary
The Guts Strangle is an alternative to the traditional strangle that uses in-the-money options instead of out-of-the-money options. While the profit/loss profile at expiration is identical, guts strangles have lower vega and theta exposure, making them better suited for traders who want to bet on price movement rather than volatility changes. The trade-off is higher capital outlay and early exercise risk. When used appropriately, the guts strangle can be a valuable tool for expressing volatility views with different risk characteristics than conventional approaches.
Explore more volatility strategies in our strap strategy guide or learn about iron condors.