Long Gut

A long gut uses ITM options that have intrinsic value built in. You're paying for both intrinsic value (guaranteed) and extrinsic value (at risk). A straddle uses ATM options with no intrinsic value - only extrinsic. However, the gut's intrinsic value is guaranteed, so you actually risk less.

No! Unlike a straddle where you can lose 100% of the premium, a long gut's maximum loss is only the extrinsic value (the amount paid above the strike width). The intrinsic value (strike width) is always recovered at expiration.

A strangle uses OTM options (call above, put below current price). A gut uses ITM options (call below, put above current price). Strangles are cheapest but have widest breakevens. Guts are most expensive but have lowest theta decay.

Yes! Long guts consist entirely of long options (defined risk), which are permitted in TFSA and RRSP accounts. No margin is required.

You profit when the stock moves beyond either breakeven - above (Call Strike + Premium) or below (Put Strike - Premium). The further it moves beyond breakeven, the more you profit. You lose (limited to extrinsic value) if the stock stays between the breakevens.

Actual risk = Total Premium - Strike Width. For example: $4.90 premium - $4.00 width = $0.90 at risk. This is because the position is always worth at least the strike width at expiration.

ITM options have less extrinsic value than ATM options. Since theta only affects extrinsic value (intrinsic doesn't decay), guts lose less to time decay. If a gut has $0.90 extrinsic vs a straddle with $1.55, the gut has ~40% less to decay.

Standard is 2-4 strikes apart, equidistant from current price. Wider guts have more intrinsic (lower theta) but higher cost and wider breakevens. Narrower guts are cheaper but more like straddles. Target extrinsic < 30% of width.

ITM American-style options can be assigned early. For calls, this typically happens before ex-dividend dates. Monitor dividend calendars and consider closing before ex-dividend. For index options (European-style), early assignment isn't possible.

A partial move doesn't generate profit but may increase position value slightly. Options: 1) Wait for further move, 2) Close if time running out, 3) Roll to later expiration, 4) Accept max loss if no further move expected.

Theta efficiency = (Profit Achieved) / (Theta Lost). Track daily extrinsic decay and compare to final profit. Guts should show better theta efficiency than straddles for equivalent moves. Target ratio > 3:1 for successful trades.

Use calendar gut when: 1) You have a longer-term volatility thesis, 2) Want to collect near-term theta while maintaining exposure, 3) Can manage 4+ legs. Simple long gut is better for: discrete events, simpler management, shorter holding periods.

Typical skew (puts higher IV than calls) means the ITM put costs relatively more. However, since both options are ITM, the skew effect is smaller than for OTM options. The intrinsic value dominates the pricing, making skew less impactful.

Target extrinsic < 25-30% of strike width. Calculate: (Total Premium - Strike Width) / Strike Width. Below 25% gives strong theta advantage. Above 40%, consider using a straddle instead as the gut advantage diminishes.

Compare at-risk capital, not total premium. Gut risks only extrinsic; straddle risks full premium. For same at-risk amount, gut often shows better returns because theta drag is lower. However, gut ties up more total capital.