← Strategy LabLesson 27 · 4:21
Long guts
Summary
Long guts is a bet on a big move either way, built with a call and a put that both start in the money: you buy the $95 call for $645 and the $105 put for $654, paying $1,299. Between the strikes the pair is always worth $1,000, so the most you can lose is $299, anywhere from $95 to $105. There is no limit on the gain above, the gain below climbs until XYZ reaches zero, and you break even at $92.01 or $107.99, the same as the $299 strangle.
Key terms
- long guts
- You buy a call with a strike below the price and a put with a strike above it, so both start in the money, betting on a big move either way.
- in the money
- An option that is worth something if used now: a call with the stock above the strike, or a put with the stock below it.
- intrinsic value
- The part of an option's price you could collect right now by using it.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- bid-ask gap
- The difference between the price buyers offer and the price sellers ask, which can be wider for in-the-money options.
- break-even on either side
Check yourself
Answer each question to see why the right answer is right.
1. What does this long guts position cost in all?
2. XYZ ends at $100 on the last day. What is your result?
3. Why is the loss only $299 anywhere between $95 and $105?
4. XYZ ends at $110 on the last day. What is your result?
5. As days pass with nothing else changing, what melts away?
Finished the video and the quiz? .