Lecture no 31 guts
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The document discusses the "Guts" options strategy, which involves buying in-the-money (ITM) calls and puts on the same stock in order to profit from a surge in volatility that drives the stock price significantly higher or lower. The Guts strategy has unlimited profit potential but limited risk, though it is more expensive than a similar strangle strategy since both options are bought ITM. Key considerations for the Guts trade include entering around news events when implied volatility is low and exiting prior to expiration to avoid time decay.
![Context - Guts
Effect of Time Decay
• Time decay is harmful to the Guts. Never keep a Guts into the last
month to expiration because this is when time decay accelerates the
fastest.
Time Period to Trade
We want to combine safety with prudence on cost. Therefore the
optimum time period to trade Guts
• Breakeven Down = Lower strike - [Net debit - difference between
strikes]
• Breakeven Up = [Higher strike] + [Net debit - difference between
strikes]](https://image.slidesharecdn.com/lectureno31-guts-200703114910/85/Lecture-no-31-guts-7-320.jpg)
![Example – Guts
Market Behavior Nifty
Option /Future Buy ITM Call & Put
Action (Long/ Short) Both
Price Movement Expectation Breakout (High Volatility)
Spot Price 11700
Strike Price (Long Call) 11600
Premium 180
Strike Price ( Long Put) 11800
Premium 190
Break Even (Up) Higher strike + [Net debit - difference between strikes] = 11600 +170 = 11770
Breakeven (Down) Lower strike - [Net debit - difference between strikes] = 11800 – 170 = 11630
Time to Expiry Start/ Mid of the Month
Position of Price in Charts At Absolute Bottom / Absolute Top /Breakout
Max Risk Limited
Max Reward UnLimited](https://image.slidesharecdn.com/lectureno31-guts-200703114910/85/Lecture-no-31-guts-15-320.jpg)
Lecture no 31 guts
- 1. Lecture No 31 Guts Rohan Sharma (Coach)
- 2. Basics Concepts – Guts Proficiency - Expert Direction – Neutral Volatility - High Asset Leg – Long Put + Long Call Max Risk - Limited Max Reward - Unlimited Capital Gain Strategies
- 3. Description – Guts • The Guts is a simple adjustment to the Strangle, but this adjustment makes it more expensive. •Instead of buying OTM options, we buy ITM calls and puts, which creates a higher cost basis. • We buy higher strike puts and lower strike calls with the same expiration date so that we can profit from the stock soaring up or plummeting down.
- 4. Description – Guts Buy ITM (lower) strike calls, preferably with near to expiration. Buy ITM (higher) strike puts with the same expiration.
- 5. Context - Guts Outlook • With Guts, your outlook is direction neutral. You are looking for increasing volatility with the stock price moving explosively in either direction. Rationale To execute a neutral trade for a capital gain whilst expecting a surge in volatility. Ideally you are looking for a scenario where Implied Volatility is currently very low, giving you low option prices, but the stock is about to make an explosive move—you just don’t know which direction. Guts are more expensive than Strangles because you are buying ITM options on both sides, as opposed to buying OTM options. a Guts is prohibitively expensive, and it would be better to carry out a long Strangle instead.
- 6. Context - Guts Net Position This is a net debit transaction because you have bought calls and puts. Your maximum risk on the trade itself is limited to the net debit of the bought calls and puts less the difference between the strikes. Your maximum reward is potentially unlimited.
- 7. Context - Guts Effect of Time Decay • Time decay is harmful to the Guts. Never keep a Guts into the last month to expiration because this is when time decay accelerates the fastest. Time Period to Trade We want to combine safety with prudence on cost. Therefore the optimum time period to trade Guts • Breakeven Down = Lower strike - [Net debit - difference between strikes] • Breakeven Up = [Higher strike] + [Net debit - difference between strikes]
- 8. Steps to Trading a Guts Steps In Actively seek chart patterns that appear like pennant formations, signifying a consolidating price pattern. Try to concentrate on stocks with news events and earning reports about to happen within a weeks. Choose a stock price range you feel comfortable with.
- 9. Steps to Trading a Guts Steps Out Manage your position according to the rules defined in your Trading Plan. Exit either a few days after the news event occurs where there is no movement or after the news event where there has been profitable movement. If the stock thrusts up, sell the call (making a profit for the entire position) and wait for a retracement to profit from the put. If the stock thrusts down, sell the put (making a profit for the entire position) and wait for a retracement to profit from the call. Try to avoid holding into the last month; otherwise, you’ll be exposed to serious time decay.
- 10. Exiting the Trade - Guts Exiting the Position With this strategy, you can simply unravel the spread by selling your calls and puts. You can also exit only your profitable leg of the trade and hope that the stock retraces to favor the unprofitable side later on. Mitigating a Loss Sell the position if you have only one month left to expiration. Do not hold on, hoping for the best, because you risk losing your entire stake.
- 11. Advantages and Disadvantages Advantages Profit from a volatile stock moving in either direction. Capped risk Uncapped profit potential if the stock moves. Disadvantages Significant movement of the stock and option prices is required to make a profit. Very expensive due to both options being ITM. Bid/Ask Spread can adversely affect the quality of the trade. Psychologically demanding strategy.
- 12. Real Time Example Guts Rohan Sharma (Coach)
- 13. Price Movement Position on Charts Rohan Sharma (Coach)
- 15. Example – Guts Market Behavior Nifty Option /Future Buy ITM Call & Put Action (Long/ Short) Both Price Movement Expectation Breakout (High Volatility) Spot Price 11700 Strike Price (Long Call) 11600 Premium 180 Strike Price ( Long Put) 11800 Premium 190 Break Even (Up) Higher strike + [Net debit - difference between strikes] = 11600 +170 = 11770 Breakeven (Down) Lower strike - [Net debit - difference between strikes] = 11800 – 170 = 11630 Time to Expiry Start/ Mid of the Month Position of Price in Charts At Absolute Bottom / Absolute Top /Breakout Max Risk Limited Max Reward UnLimited
- 16. Guts Strike Price Long Call 11600 Premium 180 Strike Price Long Put 11800 Premium 190 Nifty at Expiry Long Call BEP - 11780 Long Put BEP - 11610 Total P&L 12300 520 -190 330 12100 320 -190 130 11900 120 -190 -70 11800 20 -190 -170 11700 -80 -110 -190 11600 -180 10 -170 11500 -180 110 -70 11400 -180 210 30 11200 -180 410 230 11000 -180 610 430