Similar to a strangle in that it has the same maximum reward, maximum risk, and possibility of profit, but is more expensive due to the reversal of the put and call positions.
Description
Involves buying a call option and a put option on the same underlying security with the same expiration date and strike price. This is also known as a long straddle. The goal of a long guts strategy is to profit from a significant price movement in either direction in the underlying security.
If the price of the underlying security moves significantly in either direction, the value of one of the options will increase, and the trader can profit by selling the option at a higher price. If the price of the underlying security remains relatively stable, both options will expire worthless, and the trader will incur a loss equal to the premium paid for the options.
Breakeven
strike price plus the premium paid for the options.
Sweetspot
Stock price goes way up or way down
Max profit
Unlimited as the price of the underlying security could move significantly in either direction
Max loss
Limited. And is equal to the premium paid for the options, which is realised if the underlying security remains relatively stable and both options expire worthless.
