A guts strangle is a volatility strategy that uses in-the-money (ITM) options instead of the out-of-the-money (OTM) options used in a standard strangle. By buying an ITM call and an ITM put, you create a position that profits from large moves in either direction while having different characteristics than a traditional strangle.
What is a Guts Strangle?
A guts strangle (also called a long guts) consists of:
- Buy 1 in-the-money call (strike below current stock price)
- Buy 1 in-the-money put (strike above current stock price)
Both options have the same expiration date. The call strike is below the put strike, with the current stock price between them.
Simple version: In a regular strangle, you buy OTM options hoping for a big move. In a guts strangle, you buy ITM options. Both options already have intrinsic value, so you are paying for "guts" - the meat of the options - rather than just time value.
Long Guts Strangle Example
Long Guts Setup
Stock XYZ is trading at $100.
- Buy 1 $95 call (ITM) for $7.00 ($5 intrinsic + $2 time value)
- Buy 1 $105 put (ITM) for $7.00 ($5 intrinsic + $2 time value)
Total cost: $14.00 ($1,400)
Intrinsic value in position: $10.00 ($1,000) - the distance between strikes
Time value paid: $4.00 ($400)
Outcomes at expiration:
- Stock at $120: Call worth $25, put worthless = $25 - $14 = +$11 profit ($1,100)
- Stock at $105: Call worth $10, put worthless = $10 - $14 = -$4 loss ($400)
- Stock at $100: Call worth $5, put worth $5 = $10 - $14 = -$4 loss ($400)
- Stock at $95: Call worthless, put worth $10 = $10 - $14 = -$4 loss ($400)
- Stock at $80: Call worthless, put worth $25 = $25 - $14 = +$11 profit ($1,100)
Understanding the Guts Strangle Payoff
The key insight is that a guts strangle always has at least $10 of intrinsic value at any stock price (the width between strikes). Your maximum loss is the time value paid, not the entire premium.
Maximum Loss
Maximum loss occurs when the stock is anywhere between the two strikes at expiration:
Max Loss = Premium Paid - Width Between Strikes
In our example: $14 - $10 = $4 ($400)
Maximum Profit
Maximum profit is theoretically unlimited. The position profits when the stock moves significantly in either direction beyond the break-even points.
Break-Even Points
- Upper break-even = Call strike + Premium paid = $95 + $14 = $109
- Lower break-even = Put strike - Premium paid = $105 - $14 = $91
Key insight: A guts strangle and a regular strangle with the same strikes have identical profit/loss profiles at expiration due to put-call parity. The difference is in the pricing and Greeks before expiration.
Guts Strangle vs Regular Strangle
| Factor | Guts Strangle (ITM) | Regular Strangle (OTM) |
|---|---|---|
| Options Used | ITM call + ITM put | OTM call + OTM put |
| Premium Paid | Higher (includes intrinsic value) | Lower (time value only) |
| Maximum Loss | Time value portion only | Entire premium |
| Break-Even Points | Same as equivalent OTM strangle | Same as equivalent ITM strangle |
| Early Exercise Risk | Higher (ITM options) | Lower (OTM options) |
| Bid-Ask Spreads | Often tighter (more liquid) | Can be wider (less liquid) |
Short Guts Strangle
You can also sell a guts strangle (short guts) to profit from low volatility:
- Sell 1 ITM call
- Sell 1 ITM put
This is a high-risk strategy with limited profit potential equal to the time value collected.
Short Guts Example
Stock at $100:
- Sell 1 $95 call for $7.00
- Sell 1 $105 put for $7.00
Total credit: $14.00
Minimum value at expiration: $10.00 (the width)
Maximum profit: $14 - $10 = $4 ($400)
Maximum loss: Unlimited if stock moves significantly
Why Trade Guts Strangles?
Advantages of Long Guts
- Lower percentage at risk: You only risk the time value, not intrinsic value
- Better liquidity: ITM options often have tighter bid-ask spreads
- More delta exposure: ITM options have higher delta, giving more immediate sensitivity
- Same expiration payoff: Identical to OTM strangle at expiration
Disadvantages of Long Guts
- Higher capital requirement: More cash needed upfront
- Early assignment risk: ITM options can be assigned early
- Dividend risk: ITM calls may be assigned before ex-dividend dates
- More complex: Harder to understand than simple OTM strangle
When to Use Guts Strangles
Long Guts
- Expecting large move: You believe the stock will move significantly
- Prefer ITM liquidity: ITM options have better fills
- Want more delta: You want immediate price sensitivity
- Before major events: Earnings, FDA decisions, etc.
Short Guts
- Expecting no move: You believe the stock will stay between strikes
- High IV environment: Time value is elevated
- Can handle unlimited risk: You have proper risk management
Managing Guts Strangles
Long Guts Management
- Stock moves significantly: Take profits when you reach your target
- Stock stays flat: Consider closing to salvage remaining value
- Time decay: The time value erodes; close before too much decay
- Early assignment: Be prepared to handle assignment on ITM options
Short Guts Management
- Stock stays flat: Let time decay work in your favor
- Stock moves: Cut losses early - unlimited risk exists
- Assignment: Monitor ITM options for assignment
- Target profit: Close at 50-75% of max profit to reduce risk
Guts Strangle Greeks
Delta
A long guts strangle has approximately zero delta when centered (the ITM call delta and ITM put delta roughly offset). As the stock moves, delta shifts.
Gamma
Positive gamma for long guts - the position becomes more directional as the stock moves.
Theta
Negative theta for long guts - time decay works against you.
Vega
Positive vega for long guts - benefits from volatility increases.
Alternative: Guts Strangle Using Vertical Spread Logic
A guts strangle can be thought of as:
- A bull call spread (ITM call) combined with a bear put spread (ITM put)
- Or simply: Long strangle + Box spread
This relationship explains why guts strangles have identical expiration payoffs to regular strangles.
Track Your Strangle Positions
Pro Trader Dashboard tracks all your options strategies including guts strangles. Monitor your Greeks, P/L, and time decay in real-time.
Tips for Trading Guts Strangles
- Compare to regular strangle: Check if pricing favors ITM or OTM options
- Watch for assignment: ITM options have higher assignment risk
- Consider dividends: Avoid ITM calls before ex-dividend dates
- Size appropriately: Higher capital requirement means fewer contracts
- Use on liquid stocks: Need tight bid-ask for good fills
- Have a plan: Know your profit target and stop loss before entering
Summary
A guts strangle uses in-the-money options instead of out-of-the-money options. While it has the same expiration payoff as a regular strangle, it requires more capital but risks only the time value portion. The strategy profits from large moves in either direction and works best when you expect significant volatility. Remember that ITM options have higher early assignment risk, so monitor your positions closely, especially around dividend dates.