Seagull Option

The little read sequel to Jonathan Livingston's Seagull. Basically, an attempt to create a Bourne Identity-style universe, only the spy character at the center of the ongoing story...is a seagull. It, uh...didn’t sell well.

In finance, the term relates to a strategy in options trading, often used in the currency market. The seagull option has three legs. (Just like a seagull? The name here needs some work.) Depending on which direction you're looking to create (bull or bear), the strategy either consists of a call and two puts...or a put and two calls.

The seagull option provides a one-way defense. You can set one up to protect you from a bet going bad because the price of the underlying asset (again, often a currency) rises. Or you can set one up to protect you from the bet going wrong because the asset price declines. But you can't use the seagull to protect you on both ends.

Part of the value of the seagull option is that the hedge you create comes without a cost. It involves both selling option contracts and buying other ones, using the premiums earned from the sales to pay for the contracts you buy.

For instance, one construction would involve buying a call at one strike price, while selling another call at a different strike. Meanwhile, you'd also sell a put. The contracts you sell allow you to pay for the one you've bought, while simultaneously setting up a hedge against unfavorable movement in the underlying asset.