Seagull Spread

Not exactly. The premium cost is zero (or near-zero), but you're trading one risk for another. By selling the naked option, you accept potentially large losses in one direction to get exposure in the other direction. It's 'free' in terms of upfront cost but not risk-free. Think of it as exchanging risks rather than eliminating cost.

Yes! Bearish Seagulls are commonly used to hedge long share positions. You buy a put spread for protection and sell a call to finance it. This creates 'zero cost' downside protection at the expense of capping your upside. Many institutional investors use this structure for quarterly hedging.

For a bullish seagull's short put: You're obligated to buy 100 shares at the strike price. For a bearish seagull's short call: You must deliver 100 shares at the strike (if you own them) or establish a short position. Assignment creates a new position you must manage or close.

You certainly can! The advantage of the seagull is zero/low cost entry. A call spread might cost A$1.50, which you lose if the stock doesn't rally. With a seagull, you get the same upside exposure without paying that A$1.50. The trade-off is accepting naked option risk on the opposite side.

Avoid seagulls when: (1) You can't accept naked option risk, (2) The stock is highly volatile in both directions, (3) There's a catalyst that could cause a big move against your direction, (4) You don't have margin approval for naked options, (5) The zero-cost structure requires too tight a short option strike.

Rolling involves buying back the short option and selling another at a different strike or expiration. For a short put: Buy back the A$45 put, sell the A$43 put (further OTM) or A$45 put in next month (more time). Target credit or scratch. If rolling costs significant debit, consider closing entirely instead.

Depends on your view. If you bought back the short put (bullish seagull), you're left with a call spread - a defined-risk bullish position. Keep it if still bullish. If you closed because you're no longer bullish, close the spread too. The remaining spread is valid on its own but changes your cost basis.

Key differences: (1) Collar has FULL protection below put strike; seagull has PARTIAL protection (spread range only). (2) Collar requires owning stock; seagull can be standalone. (3) Collar often costs money; seagull targets zero cost. (4) Seagull has continued loss below spread; collar is flat. Choose collar for full protection, seagull for cheaper partial protection.

30-60 DTE is common. Too short (<30 DTE) doesn't give enough time for direction to materialize and theta affects all legs rapidly. Too long (>60 DTE) ties up margin longer and reduces theta benefit from short options. 45 DTE is a popular sweet spot, with exit at 14-21 DTE.

Calculate what each leg 'should' cost based on delta and IV. If the short option is providing significantly more premium than its delta suggests, skew is working in your favor. Compare net cost to alternatives: Is the 'free' seagull better than paying A$1 for just the spread? Model P&L across scenarios to see if the structure makes sense.

Steep put skew elevates OTM put IV. In bullish seagull, you sell this expensive put. If put skew is at 80th percentile (very steep), you're selling historically overpriced puts. Track skew percentile and enter bullish seagulls when put skew is extreme. Conversely, flat put skew makes bullish seagulls less attractive - you're not getting skew subsidy.

Create a correlation matrix for your underlyings. In stress scenarios, use correlation = 0.9+ for all equities. Sum your short option deltas - this is your aggregate crash exposure. If you have 5 bullish seagulls with short put delta of -0.20 each, aggregate delta is -1.0 - equivalent to being short 100 shares of a diversified portfolio. Size based on aggregate, not individual.

Extended seagull (adding wing to cap naked risk) makes sense when: (1) Mandate prohibits naked options, (2) Tail risk concerns exceed small cost of protection, (3) Sizing needs to be larger (defined risk allows more contracts), (4) Institutional compliance requires defined risk. The cost is typically A$0.20-0.50 extra for defined vs. unlimited risk - cheap insurance for many.

Term structure affects the short option's value. If front-month IV > back-month IV (backwardation), near-term short options are relatively expensive - good for seagulls. If contango exists (back > front), your short option collects less premium. Also, if using different expirations across legs (calendar seagull), these relationships determine feasibility of zero-cost structure.

Research suggests: (1) Take profits at 50-75% of max when in call spread zone - the remaining profit requires exact pin. (2) Exit by 14-21 DTE regardless - gamma risk on naked option increases. (3) Never let short option go ITM without action - manage at first warning. (4) If flat zone at 14 DTE, often best to close for scratch rather than holding through gamma zone.