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.
Related or Semi-related Video
Finance: What Is a Put Option?83 Views
finance a la shmoop what is a put option? hot potato hot potato
ow ow! yeah remember that game well nobody wanted the potato, poor thing. the
players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]
of work the same way. a put option is the right or option or choice to sell a
stock or a bond at a given price to someone by a certain end date.
all right example time. you bought netflix stock at the IPO a zillion years
ago at $1 a share. that's you know splits adjusted. all right now it's a hundred
bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in
California that would be a tax of something like almost 40 bucks. well the
stock was a hundred but you keep only something like 60. feels totally unfair.
right so you really don't want to sell your stock but you're nervous about the [graph shown]
next few months that Netflix will crater for a while and go down ten
maybe twenty dollars. longer term though you think it'll hit 300. so this is the
perfect setup to maybe look at buying some put options on Netflix. if the stock
goes down your put options go up. with Netflix volatile but at a hundred bucks
a share ,you look up the price of an $80 strike price put option expiring in
December, and you know that's mid-september now .for five bucks a share
you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]
term life insurance. you pay the five dollars a share in the stock goes down
to 82 by mid December, worst of all worlds. well not only did you lose the $5
a share but your stock has lost $18 in value. but had Netflix really cratered
and gone to say $60 a share well you would have exercised your put and sold
your shares at 80 bucks. well those put options you paid $5 for
would be been worth 15 bucks a share. in buying that put option you've [equation shown]
guaranteed that your loss will be no more than a $75 value for your Netflix
position at least for that time period and ignoring taxes. well remember that
options expire after December whatever like the third Friday of the month it's
usually when options expire, you then have no protection and your shares float
along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]
raunchy. yeah well that's naked put options.
that's what they really are people.
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A derivative of a security is a "something" which derives its value based on the performance of that security... either a put option or a call option.