Picture this: you have a view that an underlying is likely to move up but could face stiff overhead resistance not far from the current price. You could initiate a long futures position along with a short out-of-the-money (OTM) call. Futures could be beneficial given that the upside potential is not much, and the contract does not suffer from time decay. But suppose you want to initiate an option strategy. This week, we discuss a three-leg strategy called seagull that you can set up to take directional bets with an objective of significantly reducing the setup cost.

Setup cost

A seagull involves a bull call spread along with a short put. So, you buy a lower strike call that is just OTM. You then short an OTM call whose strike is just above the resistance level. The bull call spread is a net debit spread, as the long call will have a higher price than the short call. You then short a put to reduce the net debit. The put strike must be just below the support level. The strike should not be very far away from the current spot price. Otherwise, the premium on the short put may not be enough to significantly reduce the cost of setting up the bull call spread. 

Note that you must have a clear directional bias on the underlying. If you are open to choosing between options and futures, the latter may be a better choice, as it moves nearly one-to-one with the underlying. But if you prefer options, a seagull is an alternative to a bull call spread, as it can offer larger gains. The trade-off is that you are exposed to losses from a naked put. This means if the underlying declines sharply, you are exposed to large losses. 

Your stop-loss for the position can work at three levels. One, if the position is set up for a sizable net credit, then you can close the position when the unrealised loss equals the net credit. Note that the position can be set up for a net credit when the premium on the short put is greater than the net debit on the bull call spread. Two, if the seagull is set up for a net debit, you can close the position if the underlying moves below your lower strike call. And three, you can, regardless of the set up cost, close the position when the underlying breaks below the support level. 

Optional trading

Suppose the resistance and support levels on the Nifty index is 25180 and 24485. If you were to initiate a long futures position at the current level along with short 25200 September call, you margin could be 2.48 lakh. If were to set up a seagull with long 24500 call, short 25200 call and short 24400 put, your margin could be 1.95 lakh. The differential margin is significant, which could prompt some traders to prefer the seagull over the switch trade. 

(The author offers training programmes for individuals to manage their personal investments)

Published on September 13, 2025