Seagull Spread

The payoff diagram resembles a seagull in flight. The flat profit zone in the middle looks like the body, and the sloping sides look like wings. One wing is capped (spread side), and one extends further (naked side).

No! While it can be entered for zero cost (no cash outlay), the naked option creates real risk. If the stock moves against your naked option, losses can be substantial. 'Zero cost' refers only to entry premium, not risk.

The naked option. In a bullish seagull, if the stock crashes, you lose like a naked put seller - potentially thousands of dollars. In a bearish seagull, if stock rallies, you lose like a naked call seller. This risk is significant.

Seagulls are not recommended for beginners. They require Level 3-4 options approval, margin account, understanding of naked option risk, and active management. Start with defined-risk strategies like vertical spreads.

You must buy 100 shares per contract at the put strike price. You need capital available. After assignment, you own the stock and can sell it, hold it, or sell covered calls against it. Be prepared for this possibility.

Match to your directional view AND confidence. Bullish + confident no crash = Bullish seagull (naked put). Bearish + confident no rally = Bearish seagull (naked call). The key is conviction on the side you're selling naked.

You can: (1) Move naked option closer to current price (more risk), (2) Narrow the spread (less profit), (3) Wait for higher IV, (4) Accept small debit entry. If requiring large debit, the risk/reward may not justify seagull structure.

When stock reaches ~75% of distance to naked strike. Roll early for credit. Rules: Only roll for credit, roll down (put) or up (call) at least one strike, roll out 2+ weeks, maximum 2 rolls before closing. Don't wait until at-the-money.

The spread portion has spread margin. The naked option has naked put/call margin (typically 20-25% of notional + premium). Total margin is the sum. Monitor margin carefully as stock approaches naked strike.

Yes - buy a long option beyond your naked strike. Example: Have naked $75 put → Buy $70 put. This creates a put spread, capping max loss. It costs premium but defines risk if you're concerned about the naked exposure.

Seagull outperforms when stock rises but not dramatically past the short call. The short call premium is captured. Risk reversal outperforms when stock rallies significantly (unlimited upside). Choose based on how bullish you are.

Common in FX and equity portfolio hedging. Structure: Put spread + naked call (for downside protection) or Call spread + naked put (for upside protection). Zero-cost structure is attractive for corporate treasury with defined hedge budgets.

Combine: (1) Delta-based (15-20 delta standard), (2) Technical analysis (below major support for puts), (3) Fundamental (price you'd willingly own stock), (4) Premium-based (generates enough to fund spread). All four should align.

A jade lizard is essentially a seagull where the credit exceeds the spread width, eliminating one side of risk. Seagull can be 'upgraded' to jade lizard by adjusting strikes to achieve this credit threshold. Jade lizard is the defined-risk cousin.

Track: Spread profit capture rate, Naked defense frequency (how often triggered), Roll success rate, Assignment frequency, Average P&L by: stock stayed in zone, stock hit spread target, stock hit naked. Analyze if your support/resistance picking is effective.