Seagull Option


DEFINITION of 'Seagull Option'

A three-legged option strategy, often used in forex trading, that can provide a hedge against the undesired movement of an underlying asset. A seagull option is structured through the purchase of a call spread and the sale of a put option (or vice versa).

Seagull Option

BREAKING DOWN 'Seagull Option'

The option contracts must be in equal amounts and are normally priced to produce a zero premium. This structure is appropriate when volatility is high but expected to fall, and the price is expected to trade with a lack of certainty on direction.

In the second example above, a hedger purchases a seagull option structured as the purchase of a call spread (two calls), financed by the sale of one out-of-the-money put, ideally to create a zero-premium structure. This is also known as 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.

  1. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  2. Put Option

    An option contract giving the owner the right, but not the obligation, ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  4. Spread Option

    A type of option that derives its value from the difference between ...
  5. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  6. Spot Price

    The current price at which a particular security can be bought ...
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