Seagull Option

What is a Seagull Option?

A seagull option is a three-legged option trading strategy that includes either two call options and a put option or two puts and a call. In the interim, a call on a put is called a split option.

A bullish seagull strategy includes a bull call spread (debit call spread) and the sale of a out of the money put. The bearish strategy includes a bear put spread (debit put spread) and the sale of an out of the money call.

Options spreads are as of now hedged positions that limit risk however cap possible profits. Adding the short position in different options further aides finance the position and conceivably carry the cost to zero. Nonetheless, it presents increased loss potential assuming the underlying asset moves too far off course.

Put another way, a seagull option is a one-course protective technique by which either downward or up movements can be gotten control over, yet entirely not both. While the seagull strategy typically includes bull call spreads and bear put spreads, they can likewise include the contrary utilizing bear call spreads and bull put spreads.

Fundamentals of Seagull Option

The options contracts must be in equivalent sums and are typically priced to create a zero premium. This structure is proper when volatility is high, however expected to fall, and the price is expected to trade with a lack of certainty on course.

In the second model over, a hedger utilizes a seagull option structured as the purchase of a call spread (two calls), financed by the sale of one out of the money put, preferably to make a zero premium structure. This is otherwise called a "long seagull." The hedger benefits from a move up in the underlying asset's price, which is limited by the short call's strike price.

Instructions to Construct a Seagull Option

Here is a model where volatility is moderately high and the trader expects the price of the underlying asset to rise while volatility falls.

In this model, the euro is trading at 1.2303.

In the first place, buy the bullish call spread with a purchase of the 1.2300 call (for 0.0041) and sell the 1.2350 call (for 0.0020). Both for the equivalent underlying asset and expiration date.

Next, sell the 1.2250 put (for 0.0017) with a similar expiration date. The net cost for this trade would be 0.0041 - 0.0020 - 0.0017 = 0.0004

At long last, change the strikes as important to bring the premium (cost) down close to zero.

Similarly as with a trading strategy, picking the right combination of puts and calls is basic. It is likewise important to ensure the expiration dates for the options are in accordance with the expectations for assumed changes in price and volatility. While this specific option strategy will assist with diminishing the level of risk assumed by the trader, the arrangement doesn't totally eliminate all volatility. There is as yet the chance that the return will be more unobtrusive than anticipated, particularly if the movement on the exchange rate isn't generally so critical as anticipated.

Highlights

• A seagull option is a three-legged currency options trading strategy to limit risk. It is carried out utilizing two puts and a call or vice versa.
• In the event that there is no critical movement on the exchange rate, returns may be unassuming utilizing this trading strategy.