Seagull Option Strategy: Three Legs, Low Premium, and Tail Risk

For educational purposes only; not investment advice.

Direct answer

A bullish seagull combines a short lower-strike Put with a long Call spread: sell one Put, buy one Call, and sell one higher-strike Call, normally on the same underlying, expiration, deliverable, and quantity. The two short-option premiums can reduce or offset the long Call’s price. That financing is not free: the short Put creates substantial downside exposure, while the short upper Call caps the upside.

“Seagull” is not perfectly standardized. Markets also use bearish, hedged-stock, and foreign-exchange variants. Identify the three legs and payoff instead of relying on the strategy label.

Structure and expiration payoff

Let the short Put strike be Kₚ, long Call strike K₁, short Call strike K₂, with Kₚ < K₁ < K₂. Let D be the initial net debit per share; a credit makes D negative. At expiration, before fees:

P/L = −max(Kₚ − S_T, 0) + max(S_T − K₁, 0) − max(S_T − K₂, 0) − D

Below Kₚ, loss grows dollar for dollar as the underlying falls.
From Kₚ through K₁, all legs expire without intrinsic value, so the result is −D.
Between K₁ and K₂, the long Call adds value dollar for dollar.
Above K₂, the Call spread is capped at K₂ − K₁.

For standard equity options, one contract commonly represents 100 shares, but adjusted contracts can differ. Confirm the deliverable. The short Put may require cash or margin, and either short American-style option can be assigned before expiration.

Example: 90 / 105 / 115 bullish seagull

With stock at $100 and 45 days remaining, suppose a trader sells one 90 Put, buys one 105 Call, and sells one 115 Call. Assume the package opens for zero net premium and the multiplier is 100:

Stock at expiration	Option value per share	Package result
`$80`	`−(90 − 80) = −$10`	`−$1,000`
`$100`	`$0`	`$0`
`$110`	`110 − 105 = $5`	`+$500`
`$125`	`(125 − 105) − (125 − 115) = $10`	`+$1,000`

The upside maximum is (115 − 105) × 100 = $1,000. If the stock reaches zero, the short Put loses 90 × 100 = $9,000, before any opening credit, fees, or stock position. A $0.40 net debit would subtract $40 from every row; a $0.40 credit would add $40.

Enter the three legs as one package limit order when available. Legging into the trade can leave an unintended naked short option, and the displayed midpoint is not a guaranteed fill.

Risks and controls

Downside tail: the short Put can approach its strike times the multiplier in loss if the underlying falls toward zero.
Capped reward: gains stop increasing above the upper Call strike, even if the underlying keeps rising.
Assignment: a short option may be assigned early. Closing one leg changes the strategy and can sharply increase buying-power requirements.
Liquidity: three bid-ask spreads, fees, and partial fills can erase an apparent low-cost entry.
Path risk: before expiration, volatility, time, rates, dividends, and skew affect all legs; the expiration table does not predict interim value.
Operational risk: mismatched expirations, quantities, or adjusted deliverables do not produce the stated payoff.

Choose the Put strike only where the resulting purchase obligation is acceptable, test a severe decline, and define an exit plan before opening.

Common misconceptions

“Zero cost means zero risk.” It describes opening premium, not loss potential.
“The short Put only finances the Call.” It is an enforceable purchase obligation after assignment.
“Capped profit means capped loss.” The bullish version remains exposed below the Put strike.
“Every seagull has this payoff.” Conventions differ; inspect signs, strikes, underlying position, and settlement.
“Three legs diversify execution risk.” More legs usually add spreads and operational dependencies.