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1. Lecture No 40
Short Guts
Rohan Sharma (Coach)

2. Basics Concepts – Short Guts
Proficiency -
Expert
Direction –
Neutral
Volatility - Low
Asset Leg –
Short Put +
Short Call
Max Risk -
UnLimited
Max Reward -
Limited
Income
Strategies

3. Description – Short Guts
 The Short Guts is a simple adjustment to the Short Strangle that
increases the net credit.
Instead of selling OTM options, we sell ITM calls and puts, which
creates a higher net credit.
The Short Guts is precisely the opposite of a (Long) Guts. We
short ITM puts and calls with a short time to expiration in order to
pick up income.
Each leg of the trade has uncapped downside.
If the stock starts going ballistic in either direction, then your
position is precarious to say the least.
If the stock remains range bound, then we’ll make a limited profit.

4. Description – Short Guts
•You would never trade this strategy right before a news event
like an earnings report.
•You certainly wouldn’t want any nasty surprises to be lurking
around the corner.
Sell ITM (lower) strike calls, preferably with one month or
less to expiration.
Sell ITM (higher) strike puts with the same expiration.

5. Context - Short Guts
Outlook
With Short Guts, your outlook is direction neutral—you are looking
for no movement in the stock.
Rationale
To execute a direction-neutral income strategy for a net credit while
expecting a future decline in volatility.
Ideally you are looking for a scenario where the immediate Implied
Volatility has been high, giving you above average options
premiums, but where you anticipate the stock to consolidate
(become less volatile) and remain range bound for the duration of
your trade.

6. Context - Short Guts
Net Position
•This is a net credit trade because you have sold calls
and puts.
•Your maximum risk on the trade itself is unlimited,
whereas your maximum reward is limited to the net
credit you receive for selling the calls and puts.

7. Context - Short Guts
Effect of Time Decay
 Time decay is helpful to Short Guts.
Because you are short in options, and because you are exposed to
unlimited downside, you want to be exposed to this position for as
little time as possible.
Time Period to Trade
At Nearby Expiry
Breakeven Down = [Lower Strike - Net Credit + Difference in Strikes]
Breakeven Up = [Higher Strike + Net Credit – Difference in Strikes]

8. Steps to Trading a Short Guts
Steps In
Try to ensure that the trend is range bound and identify clear areas of support
and resistance.
Try to ensure that no news is coming out soon for the stock.
Steps Out
Manage your position according to the rules defined in your Trading Plan.
Close the losing side by buying back the relevant option if the stock breaks
support or resistance.
Buy back both options if the position is profitable but you think news may
emerge about the underlying stock.

9. Exiting the Trade - Short Guts
Exiting the Position
 With this strategy, you can simply unravel the spread by buying
back your calls and puts.
Mitigating a Loss
Buy back your sold options.

10. Advantages and Disadvantages
Advantages
Profit from a range bound stock.
Comparatively high-yielding income strategy
High premiums because both options are ITM.
Disadvantages
Uncapped risk if the stock moves in either direction.
Capped reward.
Almost certain exercise at expiration.
Bid/Ask Spread can adversely affect the quality of the trade.
High-risk strategy; not for novices or intermediates.

11. Real Time Example
Rohan Sharma (Coach)

12. Price Movement
Position on Charts
Rohan Sharma (Coach)

14. Example – Short Guts
Market Behavior Nifty
Option /Future Short ITM Call & Put
Action (Long/ Short) Both
Price Movement Expectation (Low 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 Sideways
Max Risk UnLimited
Max Reward Limited

15. Short Guts
Strike Short ITM Call 11600 Premium 180 BEP 11780
Strike Short ITM Put 11800 Premium 190 BEP 11610
Nifty at Expiry Short Call BEP - 11780 Short Put BEP - 11610 Total P&L
12300 -520 190 -330
12100 -320 190 -130
11900 -120 190 70
11800 -20 190 170
11700 80 100 180
11600 180 -10 170
11500 180 -110 70
11400 180 -210 -30
11200 180 -410 -230
11000 180 -610 -430