Seagull Spread
A Seagull Spread is a three-leg options strategy that combines a risk reversal with the sale of an additional out-of-the-money option, creating a bounded directional trade that is typically entered at zero or minimal cost, resembling a seagull's wingspan on a payoff diagram.
The Seagull Spread is most commonly used in foreign exchange markets but applies equally to equity options. The strategy is constructed by buying an at-the-money or slightly out-of-the-money option in the desired direction, selling an out-of-the-money option in the same direction at a higher strike to cap gains, and selling an out-of-the-money option in the opposite direction to generate premium that funds the structure.
For a bullish seagull, the trader buys an at-the-money call, sells an out-of-the-money call (the upside cap), and sells an out-of-the-money put (the downside risk leg). The premium from the two sold options offsets the cost of the bought call, making the structure zero-cost or near-zero-cost at entry.
The payoff diagram resembles a seagull in flight when plotted against the underlying price. The body of the seagull represents the profit zone between the call strikes. The wings spread out to losses on either side — the put wing on the downside and a bounded profile on the upside that reverts once beyond the short call strike.
Maximum profit is achieved when the underlying settles near the short call strike at expiration. Below the short put strike, the structure begins losing money as the short put moves into the money. Above the long call strike, gains are capped by the short call.
The key advantage of the seagull over a simple call spread or risk reversal is the zero-cost entry. Treasurers and corporate hedgers who need protection against adverse currency moves but lack a hedging budget find seagulls attractive because the structure self-finances. The cost of this zero-cost entry is accepting downside exposure below the short put strike.
Seagull spreads require careful monitoring because they have three legs to manage, and changes in volatility affect each leg differently. In practice, traders often enter seagulls when implied volatility is elevated and premium selling is rewarded, making the zero-cost structure achievable with better strike placement.