What is a Seagull Spread?
There are bullish and bearish versions. A common bullish Seagull can be thought of as:
Buy a lower-strike call and sell a higher-strike call.
Uses put premium to reduce the cost of the call spread.
Core bullish structure
| Leg | Action | Example Strike |
|---|---|---|
| 1 | Sell Put | $90 |
| 2 | Buy Call | $100 |
| 3 | Sell Call | $110 |
All options use the same expiration.
Worked example
Assume the stock trades at $100.
| Leg | Premium |
|---|---|
| Sell $90 Put | +$2.00 |
| Buy $100 Call | -$6.00 |
| Sell $110 Call | +$4.00 |
Expiration outcomes
| Stock Price | Approximate Outcome |
|---|---|
| $70 | Large loss from short put |
| $90 | About $0 |
| $100 | About $0 |
| $105 | +$500 |
| $110 | +$1,000 max call-spread profit |
| $130 | +$1,000 max call-spread profit |
Maximum profit
The call spread caps upside profit.
Downside risk
The short put creates substantial downside exposure below its strike.
Why use it?
- Express a directional view with low or zero upfront premium.
- Define upside payoff with a vertical spread.
- Use premium from the extra short option to finance the trade.
- Customize asymmetric risk.
Bullish vs. Bearish Seagull
| Version | Core Structure | Main Risk |
|---|---|---|
| Bullish Seagull | Bull Call Spread + Short Put | Large downside loss |
| Bearish Seagull | Bear Put Spread + Short Call | Large / potentially unlimited upside loss |
Seagull vs. Bull Call Spread
| Feature | Seagull | Bull Call Spread |
|---|---|---|
| Upfront cost | Can be low or zero | Usually debit |
| Upside profit | Capped | Capped |
| Downside risk | Large due to short put | Defined to debit |
| Complexity | Higher | Lower |
Seagull vs. Collar
| Feature | Seagull | Collar |
|---|---|---|
| Requires stock ownership | No | Yes |
| Uses short option to finance protection/exposure | Yes | Yes |
| Main purpose | Directional trade | Protect stock |
| Risk profile | Asymmetric | Typically bounded around stock ownership |
Assignment risk
The extra short option and the short leg of the vertical spread can be assigned before expiration.
Volatility and time decay
The Greeks depend heavily on strike placement, but the short option helps offset some of the long option's time decay and volatility cost.
Pros and cons
- Can be entered for little or no premium.
- Directional upside/downside exposure can be customized.
- Vertical spread keeps one side capped.
- Useful for expressing asymmetric views.
- Extra short option adds substantial tail risk.
- Assignment risk.
- More complex than a vertical spread.
- Margin requirements can be significant.
- “Zero-cost” can hide large economic risk.
How to close it
Closing all legs together helps preserve the intended payoff.
Common mistakes
- Thinking zero premium means zero risk.
- Ignoring the extra short option.
- Using the strategy on a stock you would not want to own after put assignment.
- Failing to calculate margin requirements.
- Confusing it with a fully defined-risk vertical spread.
Beginner checklist
| Check | Question |
|---|---|
| ☐ Direction | Am I clearly bullish or bearish? |
| ☐ Vertical spread | What is the capped profit from the spread? |
| ☐ Extra short option | What new risk does it create? |
| ☐ Net premium | Is the trade a debit, credit, or near zero-cost? |
| ☐ Assignment | Can I handle assignment on the short option? |
| ☐ Margin | Can my account support the tail-risk obligation? |
| ☐ Simpler alternative | Would a Bull Call Spread or Bear Put Spread be safer? |
Key takeaway
It is a directional, asymmetric strategy that can reduce or eliminate upfront premium.
The trade-off is: cheaper directional exposure in exchange for added tail risk on the side of the extra short option.