Posted in Finance, Accounting and Economics Terms, Total Reads: 320
Definition: Gut Spread
There can be instances where an investor be sure of significant stock movements but be unsure whether it would be up or down. In such cases, an option strategy can be created by either buying or selling both, an in-the-money call and an in-the-money put. To buy both, would be to use a Long Gut Spread and thee are when investors believe there will be significant movement.
However, there can also be instances where the investor is convinced of minimal movement in either direction, in which case a short gut spread is used to make profits.
When an investor enters a short position, the investor receives a large premium up-front and hopes that the options expire worthless and therefore he make profit. In the long position, he hopes that there is large movements in price so that the value of options in hand increases.
A gut spread strategy is extremely risky and should not be used by novice investors and requires significant experience and perception of the market.