Seagull Spread (Asset Allocation - Campos)

CFA Level III Portfolio Management
#1
  • Strategy 2. For CHF exposure, the appropriate strategy is to be long put options at a strike price of 2.5309, short put options with a strike price 2.5049, and short call options with a strike price of 2.5669.
  • Strategy 2 does allow for participation in upside gain to BRL/CHF 2.5669 at which point the short call kicks in. The expectation is for an appreciation to BRL/CHF 2.5642.

is this short seagull spread or long seagull spared? I thought the long put strike price needs to be lower than the short put option strike price. Any thoughts on this?

Thank you!

#2

Draw a picture of the payoff diagram; that’s Level I stuff.

I’d start by listing the options in the order of their strike prices, lowest to highest or highest to lowest.

#3

Thanks for the reminder! I think what confused me was how can both Strategy 1 an 2 below be seagull spread if we are using two puts and one short call? The only difference is the put spread strike price. I think I can draw a diagram with the strategy 2 with the downward trend seagull spread. But I dont think I can draw one for strategy 1.

Strategy 1:

The long put at lower strike price + short put at higher strike price = Bull Spread

Then we add a short call to bull spread? Dont know how it looks like now.

Exhibit 3

Spot and Forward Rates for AUD and CHF

Currency

Current

Six-Month

Six-Month Forecast

Pair

Spot Rate

Forward Rate

Spot Rate

BRL/AUD

2.1046

2.1523

2.0355

BRL/CHF

2.5309

2.4641

2.5642

  • Strategy 1. For AUD exposure, the appropriate strategy is to be long put options at a strike price of 2.1046, short put options with a strike price 2.1356, and short call options with a strike price of 2.1456.
  • Strategy 2. For CHF exposure, the appropriate strategy is to be long put options at a strike price of 2.5309, short put options with a strike price 2.5049, and short call options with a strike price of 2.5669.

Exhibit 3 indicates that the expectation is for the AUD to depreciate to BRL/AUD 2.0355 and for the CHF to appreciate to BRL/CHF 2.5642. Strategy 1, the short seagull on the AUD only provides downside protection to BRL/AUD 2.1356 (when the short put kicks in and neutralized the hedge), not BRL/AUD 2.0355. Strategy 2 does allow for participation in upside gain to BRL/CHF 2.5669 at which point the short call kicks in. The expectation is for an appreciation to BRL/CHF 2.5642.

#4

strategy 1 is short seagull spread with Long ATM Put & short both Call & Put @OTM.

strategy 2 i think modification from strategy 1 with Long deeper OTM Put (10 delta).

#5

I think I am still confused about the Strategy 1.

How does the short seagull spread look like? Downward trend seagull just like strategy 2?

The long put at lower strike price + short put at higher strike price = Bull Spread

Then we add a short call to bull spread to make it a downward trend seagull?

Thanks!

#6
  • Strategy 1. For AUD exposure, the appropriate strategy is to be long put options at a strike price of 2.1046, short put options with a strike price 2.1356, and short call options with a strike price of 2.1456.

Anyone can help explain why this is a short seagull spread?

If this is the short seagull, shouldn’t the SHORT PUT strike price less than the long put strike price?

#7

I think I finally figured this out. I was missing the underlying security all the time when I drew the graphs…

Listing a couple of points helped me in case someone else has the same issues.

  1. A long Seagull Spread= Bear put spared + Short Call = collar + Short Put

  2. Put Spread could be Bull put spared or Bear put spared without the underlying

  3. Collar = underlying + short reversal

Thanks for all the help!

#8

Short risk reversal = Collar (yes of course already included Long Base Security)

i am try to memorize Long Seagull by put & call components not by bear/collar.

#9

I agree. use call and put components individually is easier to remember. I just saw a couple of statements that threw me off by combining collar or put spared with something else to come up with the seagull.

#10

.

#11

Can you point out where are the erros?

#12

I think I am stuck with this question again for half an hour now… Clear with the second strategy but not the first one. Any help would be much appreciated!!

Spot Rate 2.1046

six month Forward Rate 2.1523

six month Spot Rate 2.0355

  • Strategy 1. For AUD exposure, the appropriate strategy is to be long put options at a strike price of 2.1046, short put options with a strike price 2.1356, and short call options with a strike price of 2.1456.
  1. How do you draw the diagram for the strategy above? The answer states it is a short seagull. For the second strategy, the diagram is below.

/

/

  1. The second strategy is called the Long Seagull, right?

  2. based another topics test question,

Long the 25-delta call, long the 25-delta put, and short the ATM call option also creates a short seagull spread.

With the same delta, does it mean the strike price is the same?