Seagull Spread

The payoff diagram resembles a seagull in flight - one wing tilted up (profit zone from the spread), one wing tilted down (loss zone from the naked short), and a body in the middle (neutral zone). The asymmetric 'wings' give it the seagull appearance.

The Seagull can be structured for zero or near-zero initial cash outlay - hence 'zero cost.' However, it's NOT risk-free. You're selling risk (the naked short option) to fund the position. If the market moves against you, you'll pay. It's 'zero cost' in terms of upfront cash, not zero risk.

Bearish Seagull is traditionally considered riskier because it contains a naked short call with theoretically unlimited upside risk. Bullish Seagull has a naked short put with risk limited to the strike price (if underlying goes to zero). However, market crashes can be severe too, so both require respect.

Yes! The naked short put (bullish seagull) or naked short call (bearish seagull) can be assigned. For American-style options, assignment can happen any time (though usually near expiration or ex-dividend). European-style index options settle in cash at expiration only.

If assigned on a naked short put (bullish seagull): You must buy the underlying at the strike price - you now own it. If assigned on a naked short call (bearish seagull): You must sell the underlying at the strike price - you're now short. You then need to decide whether to keep or close the position.

Choose Seagull when: (1) You want zero or near-zero cost, (2) You're willing to accept naked option risk, (3) You have a view on both direction AND where you'd be willing to take assignment. Choose vertical spread when: (1) You want defined risk, (2) You're willing to pay the debit, (3) You don't want naked option exposure.

Typically 0.15-0.25 delta. Lower delta (0.10-0.15) provides more cushion but less premium to fund the spread. Higher delta (0.25-0.30) provides more premium but more risk. Choose based on technical levels and your risk tolerance.

A Collar requires owning the underlying stock (protective put + covered call). A Seagull is purely options - no underlying position required. Collar is defined risk on both sides. Seagull has naked risk on one side. Both can be zero-cost, but the risk profiles differ significantly.

Yes! This is a common adjustment. If the underlying is approaching your short option, you can buy it back and sell a new one further OTM. This costs money (debit) but gives more room. The spread remains unchanged.

Margin requirements increase as the naked short option moves toward or into the money. You may receive a margin call requiring additional funds. Monitor margin closely and have a plan to close or adjust before margin becomes critical.

Very common in FX hedging: Importers (need to buy foreign currency) use bullish seagulls on the currency. Exporters (need to sell foreign currency) use bearish seagulls. The zero-cost nature is attractive for corporate treasuries. Similar use in commodity hedging by producers and consumers.

Multiple Bullish Seagulls on correlated underlyings = concentrated crash risk (all short puts get hit together). Multiple Bearish Seagulls on correlated underlyings = concentrated rally risk. Diversify across uncorrelated underlyings or balance bullish and bearish Seagulls.

For Bullish Seagull: Put skew (elevated OTM put IV) helps - your short put receives more premium. Check IV at short put strike vs ATM. For Bearish Seagull: Typically less favorable skew, but check call IV. Consider strike adjustments to optimize based on skew.

Don't hold through earnings - gap risk is too high for the naked short. Best approach: (1) Close before earnings, (2) Reopen 1-2 days after when direction is clearer and IV is still elevated. Post-earnings IV provides good funding for the short option.

A Double Seagull combines bullish and bearish Seagulls: Bull call spread + Short put (bullish) PLUS Bear put spread + Short call (bearish). Result: profit in the middle zone from spreads, but exposed to both crash and rally risk. Similar to a short strangle with spread wings for income. Use when expecting range-bound trading.