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I'm looking at different option strategies and the ways that their payoffs differ (and therefore how they can differently be used).

I'm looking at the long seagull (buy a call spread and sell a put), and wondering if taking the opposite positions in these would provide an unlimited payoff with decreasing strike and a limited loss with increasing strike?

As an example:

  • Buy a put with strike 1.2
  • Sell a call with strike 1.3
  • Buy a call with strike 1.4

Should the two calls not cancel once the strike hits 1.4 and therefore this is your maximum loss? Whilst a strike 1.2 and below will result in a profit (ignoring premiums)?

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  • $\begingroup$ To clarify, rather than unlimited payoff for a decreasing strike I should say an increasing payoff with decreasing strike. Obviously up to some sort of bound (not necessarily zero as EUR is in a negative rates world). $\endgroup$
    – user403033
    Jan 15, 2019 at 11:49

2 Answers 2

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Based on your example, at expiry, your gains on your put will be between 0 - 1.2 of your underlying; you will be flat between 1.2 - 1.3; you will lose between 1.3 - 1.4 due to your short call; and you will be flat > 1.4 of your underlying due to your long call offsetting your short call, ignoring premiums.

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Long put always has limited payoff (bounded by the strike)

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    $\begingroup$ This does not provide an answer to the question. To critique or request clarification from an author, leave a comment below their post. - From Review $\endgroup$
    – skoestlmeier
    Jan 14, 2019 at 21:42
  • $\begingroup$ @skoestlmeier this was not a criticism, i answered the first question. Why the downvote ? $\endgroup$
    – Ezy
    Jan 14, 2019 at 21:43
  • $\begingroup$ I was not the one who downvoted, but i would like to encourage the downvoter to also add a comment on his decision here. However, i appreciate your contributions a lot, but as OP is a newcomer here, i suggest you to provide a more detailed answer with background information for clarification (like the accepted answer). $\endgroup$
    – skoestlmeier
    Jan 14, 2019 at 21:47
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    $\begingroup$ @skoestlmeier understood i’ll try to make an effort since OP made an effort himself to formulate his question clearly. Too many times new comers ask a very generic question and i recognize i don’t feel very eager to expand a lot in those situations. But thanks for your comment! $\endgroup$
    – Ezy
    Jan 14, 2019 at 23:38

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