A guts spread that is established by combining short in-the-money calls and short in-the-money puts, with all options having the same expiration date, but different strike prices.
Short guts spread = short ITM calls + short ITM puts
This strategy is used when a trader expects that the underlying will experience low volatility in the near future. To that end, he will sell both a call option and a put option on the same underlying.
The short guts spread has limited profit potential: the maximum potential profit is when the underlying falls between the strike prices at expiration. The trader will benefit from the loss in the option’s time value to make a profit. Furthermore, this spread has unlimited risk: there is the potential for large losse if the underlying substantially moves upwards or downwards.
