The Long Guts is a neutral strategy in options trading that involve the simultaneous buying of an in-the-money call option and an in-the-money put option of the same underlying stock and expiration date.
Buy 1 call at the call strike price; Buy 1 put at the put strike price. Use the same expiration date.
This is an unlimited profit, limited risk strategy that is taken when the options trader thinks that the underlying stock will experience significant volatility in the near term. The Long Guts is a Debit Spread as a net debit is taken to enter the trade.
Unlimited Profit Potential
Large gains for the Long Guts strategy is attained when the underlying stock price makes a very strong move either upwards or downwards at expiration. The move in the underlying stock price must be strong enough such that either the long call or the long put rise enough in value to offset the loss incurred by the other option expiring worthless.
Unlimited on the upside. Downside profit is capped at a stock price of zero.
Limited Risk
Maximum loss for the Long Guts strategy occurs when the underlying stock price on expiration date is trading between the strike prices of the options bought. At this price, while both options expire in the money, they have lost all their time value. It is this loss in time value that is the cost of employing the Long Guts strategy.
The total premiums paid minus the difference between the put and call strikes.
Breakeven Point(s)
There are 2 break-even points for the Long Guts position. The breakeven points can be calculated using the following formulae.
Upper breakeven: call strike price plus the total premiums paid. Lower breakeven: put strike price minus the total premiums paid. 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 Long Guts strategy by buying a JUL 35 call for $600 and a JUL 45 put for $600. The net debit taken to enter the trade is $1200.
If XYZ stock rallies and is trading at $50 on expiration in July, the JUL 45 put will expire worthless but the JUL 35 call expires in the money and has an intrinsic value of $1500. Subtracting the initial debit of $1200, the options trader's profit comes to $300.
On the other hand, 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. Selling these options will net the options trader $1000 and because an initial debit of $1200 was taken to enter the trade, the result is a net loss of $200.
These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.
Commissions
For ease of understanding, these examples exclude commissions, fees and financing costs. Include all costs when comparing an actual position; there is no universal commission amount.
For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.
Similar Strategies
The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.
Short Guts
The converse strategy to the Long Guts is the Short Guts. Short Guts are used when little movement is expected of the underlying stock price.
Before expiration and assignment
The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.
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.
