Seagull Spread
Buy a put spread and sell an OTM call to finance it. A low-cost or zero-cost hedge for long stock positions.
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What is a Seagull Spread?
A seagull spread is a three-leg hedging strategy. You buy a put spread to protect the downside and sell an OTM call to help pay for it. The goal is to create downside protection at little or no cost. The call you sell finances the put spread, so the hedge is cheap — but it caps your upside.
Think of it as a collar with an extra put leg. You are wrapping protection around a stock position, but instead of a simple put, you use a put spread (which is cheaper) and pay for it by selling a call. The name "seagull" comes from the three wings of the payoff diagram — two put strikes and one call strike spread out like a bird in flight.
How to Set It Up
- Buy 1 OTM put near the current price (protection starts here)
- Sell 1 further OTM put below the first put (limits the protection)
- Sell 1 OTM call above the current price (finances the trade)
- All same expiration
- Strike selection: The put spread should cover the area where you want protection. The short call should be above your target price — high enough that you are comfortable giving up upside beyond it.
- Expiration: Match the hedging period. 30-90 days is common.
- Net cost: Ideally zero or close to zero. Adjust strikes until the call premium offsets the put spread cost.
This is applied over an existing long stock position. Without the stock, it is just a combination of options with a different meaning.
When to Use This Strategy
Use a seagull spread when:
- You own stock and want downside protection
- You do not want to pay full price for a protective put
- You are willing to cap your upside to reduce hedging costs
- You want a structured hedge for a specific time period
- You are a portfolio manager who needs to protect positions cost-effectively
Seagulls are popular with institutional investors and corporate treasuries hedging currency or commodity exposures. Retail traders can use them too — the concept is the same. You are trading upside potential for cheaper downside protection.
Example Trade
You own XYZ at $100. You want protection for the next 60 days but do not want to pay $3-4 for a put.
- Buy 1 XYZ $97 put for $2.00
- Sell 1 XYZ $90 put for $0.50
- Sell 1 XYZ $108 call for $1.50
- Net cost: $2.00 - $0.50 - $1.50 = $0.00 (zero cost!)
If XYZ drops to $93: The $97 put is worth $4, the $90 put is worthless, the call is worthless. The put spread pays you $400. Your stock lost $700. Net loss: $300 instead of $700. The hedge saved you $400.
If XYZ crashes to $85: The $97 put is worth $12, the $90 put costs $5, the call is worthless. Put spread pays $700 (maxed out at the $7 width). Stock lost $1,500. Net loss: $800. The protection has a floor.
If XYZ rallies to $115: Stock gained $1,500. But the $108 call costs $700. Net gain: $800. Your upside is capped at $108.
If XYZ stays at $100: Everything expires worthless. No cost, no benefit. You just held the stock.
Risk and Reward
- Max profit on the hedge: (Put spread width - net cost) x 100. ($7 - $0) x 100 = $700 of downside protection.
- Max loss: On the stock + seagull combination, the risk is the stock dropping below the long put minus the put spread protection. Also, if the stock rallies hard, the short call creates unlimited risk above the call strike (though you have stock to deliver).
- Breakeven: Stock purchase price plus net debit of the seagull. In a zero-cost seagull, the breakeven is just your stock price.
If you own the stock, the short call is "covered" and there is no unlimited risk. The real risk is a massive drop below the put spread.
Tips and Common Mistakes
- Make sure the short call is covered. If you do not own the underlying stock, the short call is naked and carries unlimited risk. This strategy assumes you own shares.
- The protection has a floor. The put spread only protects between the two put strikes. Below the lower put, you are unprotected again.
- Choose the call strike carefully. If the stock is likely to rally, sell the call at a higher strike — even if it means paying a small debit for the seagull.
- Good for earnings or event hedging. Set up a seagull before an uncertain event to protect the downside cheaply.
- Roll the seagull if you need ongoing protection. As expiration approaches, roll all three legs to a new cycle.
Related Strategies
- Collar — simpler two-leg hedge: buy put, sell call over stock
- Protective Put — full downside protection without selling a call
- Bear Put Spread — the put spread component on its own
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