I know somewhere on the forum this was asked, but I still don’t understand the strategy. Any upside potential? Arbitrage opportunity? Is the seagull graph different based on if calls or puts are used? What’s the main reason an investor would prefer seagull over other strategies? Thanks a ton!
short seagull consists of a long out-of-the-money(OTM) or at-the-money(ATM) put, funded by a short put that is deeper OTM and a short call that is also OTM.
this is just bear spread using puts + short OTM call
the strategy provides inexpensive downside protection at the cost of losing upside potential due to the short call. maximum profit is achieved when the price drops to the exercise price of the short put.
long seagull is not mentioned in the curriculum but consists of a bull spread using calls(long ATM/shallow OTM call, short high OTM call) + short OTM put. this strategy is used when you think an asset is going up but stops just at the short high OTM exercise price.
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Thanks Edbert, this is very helpful.
Seagull options are fairly simple. They’re basically, “Should I fly over the ocean, or walk on the beach?” 