Long Guts
A long strangle variant using ITM strikes instead of OTM — buy 1 ITM call and 1 ITM put. More expensive but with higher initial delta.
Profit / Loss Diagram
Long Guts at expiration
What is this strategy?
The Long Guts is a variant of the Long Strangle but with <em>in-the-money</em> strikes instead of out-of-the-money ones. Construction: buy 1 ITM call, struck below the current price, and buy 1 ITM put, struck above it. Both options therefore start with intrinsic value, which reduces theta drag but raises the initial cost.
Compared with a classic OTM strangle, the Long Guts is more expensive because you pay in-the-money premium, but it is also <em>less sensitive to IV crush</em> and has a <em>higher probability of profit</em> because it is already in the money. Maximum loss occurs if price finishes between the two strikes, where both lose intrinsic value.
Useful when out-of-the-money liquidity is thin, or when you expect a strong move without wanting to pay much theta. It can also be more tax-efficient in some jurisdictions, where the intrinsic component is treated differently from the extrinsic one.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| BUY | 1 Call | ITM (lower) | 30-60 DTE | +1 SPY May 440 Call |
| BUY | 1 Put | ITM (higher) | Same expiry | +1 SPY May 460 Put |
Example
SPY at $450, you expect a strong move. Long Guts at strikes 440/460.
- Long 440 Call (ITM by $10) −$1,300 ($1,000 intrinsic + $300 extrinsic)
- Long 460 Put (ITM by $10) −$1,300 ($1,000 intrinsic + $300 extrinsic)
- Net Debit $2,600
- Maximum Loss $600 (debit $2,600 − $2,000 of guaranteed intrinsic) with SPY between $440 and $460
- Profit if SPY = $400 +$3,400 (put intrinsic $6,000 − $2,600 debit)
The Greeks
The two in-the-money positions carry opposite deltas of similar magnitude, so they cancel.
Only the extrinsic component decays. Far less than an OTM strangle.
Benefits from rising IV, though less than an OTM strangle.
Long gamma, but less than an ATM strangle.
Position Management
- 01 Longer Holding Period Guts carry less theta drag, so you can hold them longer than a classic strangle.
- 02 Take Profits on Intrinsic Value When one leg recovers or exceeds its initial premium, consider closing to bank the gain.