DEFINITION of 'Gut Spread'

An option strategy created by buying or selling an in-the-money put at the same time as an in-the-money call. Long gut spreads are used by option traders in instances where they believe that the underlying stock will move significantly, but are unsure whether it will be up or down. In contrast, a short gut spread is used when the underlying stock isn't expected to make any significant movement.

BREAKING DOWN 'Gut Spread'

By entering into a short position, the investor, receiving a large premium up-front, hopes that the options expire worthless. The long position, on the other hand, requires that the underlying stock sees a large movement in price, thus increasing the value of the options held. This is a very risky strategy and should not be implemented by novice option traders.

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