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Guts strangle

A strangle built from in-the-money options — long call below the money and long put above it — so the position starts with intrinsic value on both legs.

A long guts buys the in-the-money call and the in-the-money put, which together always contain the distance between the strikes in intrinsic-value. Pay more than that distance plus expected movement and you have simply overpaid; the extrinsic portion is what you are actually trading.

Nobody uses guts because they are cheap. They are used when the in-the-money lines are more liquid than the out-of-the-money ones, or when the bid-ask-spread on the wings is punitive. The cost is a much larger cash outlay and real early-assignment risk on the short version.

Example: XYZ at $50. Buy the $45 call at $5.90 and the $55 put at $5.70, total $11.60 against a guaranteed $10 of intrinsic. You have paid $1.60 of extrinsic for the move — compare that with the $45 put plus $55 call strangle, which is all extrinsic, before deciding.

Related: strangle, straddle, moneyness, intrinsic-value

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.
Payoff of a long straddle at expiryA V shape with its point at the strike and both arms rising through zero as the price moves away.Profit / loss per share08090110120Profit if the move is big enough, in either directionStrike 100Breakeven 92Breakeven 108Max loss 8 — both premiums, if it finishes at 100Underlying price at expiry
Long straddle: payoff at expiry. A 100 call and a 100 put bought together for 8 make a V. A quiet market that ends near 100 costs the whole 8; the position only turns positive once the price finishes below 92 or above 108, whichever way it goes.

Educational only, not advice. Spotted an error? Post in Site Feedback.