Contents

Guts

Guts is used when you expect a big move in either direction but you are unsure of the direction. It involves buying an In-the-Money put option and an In-the-Money call option.

Buying a CALL and a PUT at the same time will increase the total cost of the position. It will take a huge move in the stock or index for you to break even or be profitable. This is one of the positions which will wipe off your trading account slowly and steadily. Do not initiate this position unless you are extremely sure that the stock or index is set for a big move. Please read through the entry checklist below before using this strategy. The value of CALLs and PUTs will decay very quickly as time decay is the biggest enemy of this position.

Trade this strategy only when the implied volatility (India VIX) is low. Also, it is better to trade this strategy intraday than overnight as the decay overnight is significant in weekly options.

Look out for stocks which have upcoming results and enter into them 2 weeks before result is announced and exit an hour before results are announced as volatility crush will destroy the premiums.

Trade Set-Up

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Buy an ITM CALLĀ 

Naked Call 1-Finvezto

Buy an ITM PUT

Naked Put-Finvezto

Long Strangle

Long Strangle-Finvezto

Entry Checklist

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Market Outlook
  • Only when you expect a huge move in the stock or the index
  • Lookout for stocks which are about to release results in the next 2 weeks. The volatility will go up in the last 1 or 2 weeks.
  • Look for Bollinger band squeeze or consolidation chart patterns
  • Volatility
  • Initiate GUTS only when the volatility is low and on the rise
  • Open Interest
  • Look for scenarios where the CALLs sold are significantly higher than the PUTs sold or vice-versa
  • Positional or Intraday?
  • Hold overnight positions only in monthly options. Overnight decay is lesser
  • In weekly options, only hold intra -day positions as time decay in weekly options is significant overnight
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is limited to the premium paid for the CALL and PUT minus the difference between the CALL and PUT strikes
  • Reward [Profit]
  • Maximum profit is unlimited in theory. In practice, most of the time, the value of GUTS decays quickly. The probability of profit is very low.
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is extremely harmful for the position.
  • Volatility impact [Vega]
  • When the Volatility increases immediately after deploying the strategy, it is helpful for the position
  • Volatility crush is harmful for the position
  • Trade Management & Exit

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    Rolling & Adjustments
  • Rolling not applicable for net debit positions. Exit with stop loss.
  • Stop Loss & Exit
  • If you are holding monthly options, you should exit at least 2 weeks before expiry as the decay in premium is high in the last 2 weeks
  • If you are trading weekly options, exit when your loss is 1-2% of your capital or within an hour of entering the position.
  • If you enter a GUTS, then there will be around 3 to 5 points decay in Nifty options every hour depending on the ITM strike
  • Do not hold GUTS more than an hour intraday in weekly options
  • Set Stop Loss at 1-2% of your capital. Do not overleverage.