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.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
Up Next
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...
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.