The long gut is an options trading strategy that can be used to try and profit when you are unsure which direction the price of a security will move in, but are confident it will make a seizable move.
It's a limited risk strategy with unlimited potential profits, and is very simple to use.
It has a higher upfront cost than some comparable strategies, but the maximum loss is actually relatively low.
The Key Points
Volatile Strategy
Suitable for Beginners
Two Transactions (buy calls and buy puts)
Debit Spread (upfront cost)
Low Trading Level Required
How to Establish
All you need to do is buy in the money call options and buy an equal amount of in the money (ITM) put options, all based on the relevant security and with the same expiration date.
The only two decisions you need to make are which strikes to use and which expiration date.
The calls and the puts should be an equal amount in the money In our opinion.
Use strikes that are relatively close to the current trading price of the underlying security so that you keep the upfront cost lower.
The expiration date you choose to use will also affect the upfront cost. If you choose a close expiration date, then the cost will be cheaper due to the reduced time value.
Case studies
Company X stock is trading at $100, and you expect the price to move significantly, but are not sure in which direction it will move.
In the money calls (strike $99) are trading at $2.50. You buy 1 contract of these (containing 100 options), at a cost of $250. This is Leg A.
In the money puts (strike $101) are trading at $2.50. You buy 1 contract of these, at a further cost of $250. This is Leg B.
You have now created a long gut for a net debit of $500.
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