How does this seagull look like?

[firefirehelphelp]

Hi everyone,

I have difficulties picturing how seagulls should look like. Is there an easy way to think about their payoff graphs?

1. For example, how does this look like - buy a 35-delta put, sell a 25-delta put, and sell a 35-delta call.

2. Also, I can’t see why the text would say “provides downside protection between the two put strike prices and upside potential to the call strike price” for the seagull mentioned in (1) above.

Thank you

[rexthedog]

https://www.google.co.uk/search?q=seagull&source=lnms&tbm=isch&sa=X&ved=0ahUKEwiimN-Zs8TbAhWILcAKHVe9DTwQ_AUICigB&biw=2019&bih=1139#imgrc=PFKhr2fWv6xEhM:

[firefirehelphelp]

Sort of expected someone would do that haha… But seriously, any help on the above? Thank you. I have searched payoff graphs for seagull using google image but haven’t been able to find one that fits the above desciption.

[PierreCFA]

Here is the seagull

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\

_____________

\

\

[firefirehelphelp]

@PierreCFA

Here is the seagull

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\

_____________

\

\

Thanks for helping out Pierre. Can you please explain how you arrived at this graph. I tried applying what S2000magician mentioned in this post below and wasn’t able to get it.

Basically you are (1) Short put - low strike price (2) Long put - medium strike price (3) Short call - high strike price.

The graphs corresponding to the above are (1) / (2) \ (3) \

So should the graph look something like this?

---

/ \

/ \

/ \

/ \

@S2000magician

If you need to build one of these things, start somewhere and move up or down:

• Bull spread
  • If you start at the left and move right, you need an upward kink (long call), then, later, a downward kink (short call)
  • If you start at the right and move left, you need a downward kink (short put), then, later, an upward kink (long put)
• (Long) butterfly
  • If you start at the left and move right, you need an upward kink (long call), then, later, two downward kinks (one to get back to level, the other to go down: two short calls), then, later, an upward kink (long call)
  • If you start at the right and move left, you need an upward kink (long put), then, later, two downward kinks (one to get back to level, the other to go down: two short puts), then, later, an upward kink (long put)
• And so on

As for which are in-the-money and which are out-of-the-money, just remember that you generally want the spot price to be somewhere in the middle of the funny business; i.e., you want one or more kinks to the left of (lower strike than) the spot price and one or more kinks to the right of (higher strike than) the spot price.

[PierreCFA]

Your graph is short put + short call

You need to add (long) a second put with medium strike

[firefirehelphelp]

@PierreCFA

Your graph is short put + short call

You need to add (long) a second put with medium strike

Hi Pierre, unfortunately I still don’t get it.

The graph is initially upward sloping because of the short put /

I then need to add a downward kink to account for the long put, this would make the graph flat ----

Finally, I have a short call which would make the graph go downwards \

That’s how I ended up with my shape.

If you can explain to me how you visualize it, I would be most grateful.

Thank you.

[PierreCFA]

First, could you draw here only

Long put and short call (with higher strike)

Ps: after that, just add the first put (short put)

[firefirehelphelp]

@PierreCFA

First, could you draw here only

Long put and short call (with higher strike)

Ps: after that, just add the first put (short put)

Wow thanks alot Pierre, yes that did help alot! I finally understand it. And for those out there wondering whether you are thinking correctly about graphs, this is a link to a payoff diagram generator I found online: http://www.designserver.de/root_andreas_emmert/downloads/optionpayoff.xls.

Really handy tool to test your understanding.

[firefirehelphelp]

Hi Pierre,

Could I ask one more thing, why does the text say “upside potential to the call strike price”. The payoff graph is clearly flat before the call strike price so why is there upside potential?

Thank you.

[bazz]

Where does the text mention Seagulls?

[PierreCFA]

I don’t think there is any upside potential for long seagull. Perhaps the text says “upside potential for a short seagull”.

[bazz]

Am I the only one who has not seen seagulls anywhere?! Could you let me know which reading/page it is in?

[firefirehelphelp]

@PierreCFA

I don’t think there is any upside potential for long seagull. Perhaps the text says “upside potential for a short seagull”.

Pierre, think I figured it out. You need to add a long stock to the seagull to see what effect it has on the portfolio. So before the call strike price, you portfolio will increase in value since the payoff graph is flat then. But after the call strike price, the seagull is \ therefore it would offset your long stock position which is /

Thank you for taking the time to respond.

[firefirehelphelp]

@bazz

Am I the only one who has not seen seagulls anywhere?! Could you let me know which reading/page it is in?

It is in currency management. LOS 19.g is schwesser.

[bazz]

@firefirehelphelp

@bazz

Am I the only one who has not seen seagulls anywhere?! Could you let me know which reading/page it is in?

It is in currency management. LOS 19.g is schwesser.

Ah okay, now I remember, I was freaking out cause I didn’t see it in the Derivatives section lol. Tanks