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Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Strip
Strap
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Long Guts

Risk: limited
Reward: unlimited

General Description
Entering a long guts entails buying lower strike in-the-money calls and buying an equal number of higher strike in-the-money puts (same expiration date). It's similar to a long strangle, but instead of using out-of-the-money options, in-the-money options are used.

(draw a long guts risk diagram here)

The Thinking
You're not bullish or bearish, but you do think a big move is coming and along with it, an expansion in volatility. Compared to a long strangle, your net debit to initiate the trade is greater, but because the stock is already in-the-money, your breakeven levels are more favorable. If the stock rallies, hopefully it rallies enough so the profit from the long calls more than offsets the loss from the long puts. If the stock drops, hopefully it drops enough so the profit from the long puts more than offsets the loss from the long calls.

Example

XYZ is at $52.50, and your analysis says a big move is coming (earnings or some other big announcement). You buy (1) 50 call for $3.50 and (1) 55 put for $3.25. The net debit to enter the trade is $6.75.

The underlying will have to move 6.75 points above $50 or below $55 to break even. Above $56.75, the put leg expires worthless and the call leg moves point-for-point with the underlying. Below $48.25, the call leg expires worthless and the put leg moves point-for-point with the underlying.

Because it would be impossible for both call and put to expire worthless, your max loss is not the full $6.75 paid to initiate the trade. Instead it’s a much more tolerable $1.75.

The PL chart below graphically shows where this trade will be profitable and at a loss.