What is a seagull spread?

A seagull spread is an options trading strategy that involves the purchase of a long protective put combined with the sale of both a call option and a deep out-of-the-money (OTM) put option. This approach allows an investor to create a limited risk profile while also enabling the potential for profit within a specific range of prices for the underlying asset.

In this strategy, the long protective put provides downside protection, safeguarding the investor from significant losses while holding the underlying asset. By also writing a call option, the investor generates premium income, which can help offset the cost of purchasing the put. The deep OTM put, on the other hand, is sold to further enhance cash flow, although it does limit the upside potential of the position beyond a certain point.

This configuration produces a risk-return profile similar to that of a bird in flight—hence the name "seagull" spread—where the trade aims to capture profits within specific price boundaries while managing risk effectively.

Each component of the strategy plays a role. The long put provides protection against declines, while the written call limits upside gains, and the written deep OTM put generates income but caps losses. This carefully constructed balance makes the seagull spread a popular choice for investors looking