---
description: "A sideways income strategy selling an ITM call at K1 and an ITM put at K2 > K1, collecting a higher premium than a short straddle but with higher risk and a narrower profit zone."
tags: [options, income, neutral, guts]
---

# Short Guts

**Section**: 2.27 | **Asset Class**: Options | **Type**: Income

## Overview
The short guts is a sideways strategy consisting of a short position in an ITM call option with strike K1 and a short position in an ITM put option with strike K2 (K2 > K1). This is a net credit trade. Since both options are ITM, the initial credit is higher than in a short straddle position; the flipside is that the risk is also higher. The trader's outlook is neutral. This is an income strategy. We assume C > K2 - K1.

## Construction
- Sell 1 ITM call option at strike K1
- Sell 1 ITM put option at strike K2 (K2 > K1), same expiry

Net credit: C  (assumed C > K2 - K1)

## Payoff Profile
f_T = -(S_T - K1)+ - (K2 - S_T)+ + C

- Upper breakeven: S*_up = K1 + C
- Lower breakeven: S*_down = K2 - C
- Max profit: P_max = C - (K2 - K1)  (if K1 <= S_T <= K2; intrinsic value reduces profit)
- Max loss: L_max = unlimited  (stock can move far in either direction)

## Key Conditions / Signals
- Neutral view; expects stock to stay in the range [K1, K2] through expiry
- The higher credit offsets the reduced maximum profit zone relative to a short straddle
- High implied volatility environment is ideal for collecting large premium

## Notes
The assumption C > K2 - K1 prevents risk-free arbitrage. Maximum profit is reduced by the intrinsic spread K2 - K1. The position is short vega and long theta with unlimited directional risk.