What Is the Seagull Option Strategy?

A seagull combines three options to shape a directional position or hedge. In a cost-reducing version, the investor buys an option spread and sells another option to help finance it. The smaller opening payment comes with an additional obligation, which can leave a substantial loss outside the protected range.

The name covers different arrangements. A stockholder might buy a put, sell a lower-strike put and sell a higher-strike call. A different construction buys a call, sells a higher-strike call and sells a lower-strike put. These positions need different payoff calculations. Start with the actual options and any underlying holding.

Two constructions behind the name

Kotak Mahindra Bank's seagull disclosure describes both arrangements for currency hedging. Its exporter version uses two puts and one call; its importer version uses two calls and one put. Each uses matching expiry and notional amounts. Those are foreign-exchange products, with their own settlement terms, rather than specifications for US-listed stock options.

In the put-based version, the long put and lower short put form a bear put spread. Adding a short call collects another premium. The call-based version combines a bull call spread with a short put. Without an underlying holding, that short put introduces losses below its strike, while the call spread's gain stops at its upper strike.

The label is broader still: ICE's commodities documentation describes seagulls as a collar with an additional option, which can be bought or sold. A description such as “three legs” or “zero premium” therefore leaves essential information missing. Record the buy or sell direction, option type, strike, quantity, expiry and underlying exposure for every component. The calls-versus-puts guide explains the underlying rights and obligations.

A fictional seagull hedge on 100 shares

Consider a teaching example using the put-based construction alongside stock. Assume an investor buys 100 fictional Harbour shares at $100 each, then opens these three options with the same expiration, 30 calendar days away:

All contracts are stipulated to be unadjusted, American-style, physically settled equity options representing 100 shares each. The premiums are invented filled prices, not live quotes or recommended strikes. They sum to zero: $100 + $300 - $400 = $0. Buying the shares still requires $10,000.

The $95 put supplies a right to sell shares. The $105 short call caps the shares' upside. Those two options, together with the stock, would form a collar, as described in the Options Industry Council's collar reference. Here, selling the additional $85 put earns $100 but adds a separate obligation to buy shares if assigned.

That extra put changes the lower tail. The OIC bear-put-spread reference explains why a long put paired with a lower short put has a capped payoff. Below $85, this pair contributes only its $10 strike difference, or $1,000. It cannot keep offsetting further losses on the shares.

The combined expiration result

Let S be Harbour's share price at expiration. With all positions intact and all contractual payoffs realised together, profit or loss in dollars is:

100 × [(S - 100) + max(95 - S, 0) - max(85 - S, 0) - max(S - 105, 0)]

The calculation includes the shares and all three options. Net opening option premium is zero. It excludes commissions, fees, bid-ask costs, dividends, financing, taxes and residual positions after unmatched exercise or assignment.

Between $85 and $95, the combined loss stays at $500. Below $85, it grows by $100 for every further dollar the shares fall. At zero, the intact position loses $9,000. At $105 or above, its gain is capped at $500. Its expiration breakeven before costs is $100.

These are consequences of this particular stock basis, strike selection and assumed premium. A net option debit would reduce every row; a net credit would increase every row. Zero opening premium does not guarantee a profitable result.

The stock holding is essential to the upper boundary. Remove the shares and the put-based option package retains an uncovered short call with theoretically unlimited rising-price loss. A payoff chart must identify whether it includes the asset being hedged.

Price and account risks before expiration

The table cannot price an early exit. Time decay erodes an option's remaining time value, all else equal. That can reduce the value of the purchased put while reducing the cost of buying back the written options. The combined effect depends on all three legs; counting two sales against one purchase does not establish that time passing will produce a gain. OIC's theta explanation describes this conditional, changing sensitivity.

Implied volatility is another pricing input. A rise can increase the value of a long option and the liability on a short option even if the share price stays still. Different strikes have different sensitivities, so the net effect needs each leg's current valuation. OIC's vega reference explains that sensitivity. Neither a zero opening premium nor the expiration table establishes the price available to close today.

FINRA's assignment guidance makes the account obligations separate from the combined strategy. In this American-style example, assignment can happen before expiration. The $85 short put can require an $8,500 purchase of 100 shares. Assignment of the $105 call requires delivery of 100 shares for $10,500. The other options do not automatically exercise or close to complete the modelled hedge. Broker funding, exercise cut-offs and the treatment of remaining positions need checking. Your broker must approve the types of option transactions involved, including spreads or uncovered writing where applicable, as FINRA Notice 21-15 explains. Opening and carrying the full position can require separate margin or collateral under your broker's rules; neither zero net premium nor the gross assignment purchase establishes the buying power required.

Liquidity also matters: closing three options involves prices at which counterparties will trade. Spreads, fees and a partial execution can change both the cash result and the remaining exposure. The position remains connected to one issuer and one option term; the earlier collar and concentration discussion explains those separate limits. OMP's cash-secured-put and put-spread comparison gives further context on how a lower put changes a downside boundary.

Read the full position before the premium

For any seagull description, write out the three option legs and the underlying position before interpreting its cost or risk. Calculate the result below the lowest strike and above the highest strike, then identify the purchases or deliveries that assignment could require. In this example, the key funding figure is an $8,500 potential share purchase, alongside a hedge whose downside offset stops growing below $85.

Sources and methodology

Researched 12 November 2026, Australia/Brisbane. The linked bank and ICE materials establish the naming and construction variants; OIC supplies the collar, spread and pricing mechanics; FINRA supplies assignment qualifications. The equity example is an author-created adaptation, not a bank product illustration. Harbour, its prices, premiums and term are fictional. The table is reproduced expiration arithmetic, with no forecast, live valuation, return estimate or tax conclusion.

Disclosure: Options Matrix Pro makes options-analysis software. General education, not financial advice. See our disclaimer.