The short guts is a neutral strategy in options trading that involve the simultaneous selling of an in-the-money call and an in-the-money put of the same underlying stock and expiration date.
Sell 1 call at the call strike price; Sell 1 put at the put strike price. Use the same expiration date.
This is a limited profit, unlimited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term. The short guts is a credit spread as a net credit is taken to enter the trade.
Profit potential
Profit is bounded for the stated stock/index position.
The total premiums received minus the difference between the put and call strikes.
Loss potential
Loss can increase without a finite upper bound as the underlying rises.
Unlimited if the stock keeps rising. Downside loss is finite at zero.
Breakeven points
Upper breakeven: call strike price plus the total premiums received. Lower breakeven: put strike price minus the total premiums received. These outer breakevens apply when the total premiums exceed the gap between strikes; disregard a negative stock price.
Example
Suppose XYZ stock is trading at $40 in June. An options trader executes a short guts strategy by selling a JUL 35 call for $600 and a JUL 45 put for $600. The net credit received when entering the trade is $1200.
If XYZ stock rallies and is trading at $50 on expiration in July, the short JUL 45 put will expire worthless but the short JUL 35 call expires in the money and has an intrinsic value of $1500. Buying back this short put to close the position requires $1500. Subtracting the initial credit of $1200, the options trader's loss comes to $300.
However, if on expiration in July, XYZ stock is still trading at $40, both the JUL 35 call and the JUL 45 put expire in the money with $500 in intrinsic value each. As the options trader had received $1200 when entering the trade, and closing the position requires only $1000, a profit of $200 is made.
Commissions
These examples exclude commissions and fees. Include all transaction costs when evaluating the profit or loss of a position.
Similar strategies
Long Guts
The converse strategy to the short guts is the long guts. Long guts are employed when large movement is expected of the underlying stock price.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
Financial mechanics reviewed:
Sources: OIC strategy reference; OIC assignment guidance. Formulas use the stated payoff assumptions; examples are illustrative, not market quotes. Editorial standards and corrections.