Christmas Tree Options Strategy

Christmas Tree Options Strategy

A Christmas tree is an options trading spread strategy achieved by buying and selling six call (or six put) options with different strikes but the same expiration dates for a neutral to bullish forecast. Buy 1 put strike price 50.00 Sell 3 puts strike price 46.00 Buy 2 puts strike price 44.00 Maximum profit is at an underlying asset price of 48.00 at expiration. Sell 1 put strike price 50.00 Buy 3 puts strike price 46.00 Sell 2 puts strike price 44.00 The maximum profit is the net credit received. For example, with the underlying asset at $50.00: Buy 1 call strike price 50.00 Sell 3 calls strike price 54.00 Buy 2 calls strike price 56.00 However, a larger move higher may also result in profit Sell 1 call strike price 50.00 Buy 3 calls strike price 54.00 Sell 2 calls strike price 56.00

A Christmas tree is an options spread strategy that involves 6 call (or put) options: buying one ATM call (put) selling 3x calls (puts) two strikes out of the money and then buy 2x more call (put) three strikes out of the money.

What Is a Christmas Tree?

A Christmas tree is an options trading spread strategy achieved by buying and selling six call (or six put) options with different strikes but the same expiration dates for a neutral to bullish forecast. This is termed a long call Christmas tree when using calls or a put Christmas tree when using put options. The strategy is also available long (bullish) or short (bearish).

This spread is essentially the combination of a long vertical spread and two short vertical spreads.

A Christmas tree is an options spread strategy that involves 6 call (or put) options: buying one ATM call (put) selling 3x calls (puts) two strikes out of the money and then buy 2x more call (put) three strikes out of the money.
This strategy pays off with a neutral to slightly bullish outcome in the underlying security.
Christmas trees can be constructed with either all calls or all puts, and may be structured as either long or short.

How Christmas Trees Work

The Christmas tree name comes from the strategy's very loose resemblance of a tree when viewed on an options chain display. The connection is tenuous, at best.

Christmas trees are similar to butterfly spreads in that they use multiple vertical spreads to box in a desired potential return. The difference is that one of the strike prices is skipped, which introduces a directional bias. For instance, if a condor spread involved the 50-55-60-65 strikes, the corresponding Christmas tree would involve just the 50-55-65 strikes (skipping the 60 strike).

The regular, or long Christmas tree with calls (sometimes referred to simply as a "call tree"), involves buying one call option with an at-the-money strike, skipping the next strike, and then selling three options with the following strike. Finally, buy two more calls with the next higher strike. The 1-3-2 structure supposedly appears as a tree.

The strategy profits from a small increase in price of the underlying asset and maxes when the underlying closes at the middle option strike price at options expiration.

Time decay is on the holder's side as the holder wants all options except the lowest to expire worthless.

Examples

Long Christmas Tree With Calls

For example, with the underlying asset at $50.00:

Long Christmas Tree with Puts

With this strategy, the holder is neutral to bearish. Sometimes referred to simply as a "put tree."

Maximum profit is at an underlying asset price of 48.00 at expiration.

Maximum loss is the premium paid to initiate the strategy.

Short Christmas Tree with Calls

Short strategies should result in a net credit to the account when initiated. This strategy profits when the underlying asset moves by a minimum direction in either direction but it is capped. The bias is bearish because it does not take much of a move lower in the underlying to make the strategy profitable. However, a larger move higher may also result in profit

The maximum profit is the net credit received.

Short Christmas Tree with Puts

This strategy results in a net credit to the account and profits when the underlying moves by a minimum in either direction. Profits come quicker with a smaller upside move although a larger downside move would also be profitable. therefore, this strategy leans bulls.

The maximum profit is the net credit received.

Related terms:

At The Money (ATM)

At the money (ATM) is a situation where an option's strike price is identical to the price of the underlying security. read more

Bear Spread

A bear spread is an options strategy implemented by an investor who is mildly bearish and wants to maximize profit while minimizing losses. read more

Bull Spread

A bull spread is a bullish options strategy using either two puts or two calls with the same underlying asset and expiration.  read more

Bull Vertical Spread

A bull vertical spread requires the simultaneous purchase and sale of options with different strike prices, but of the same class and expiration date. read more

Butterfly Spread

Butterfly spread is an options strategy combining bull and bear spreads, involving either four calls and/or puts, with fixed risk and capped profit. read more

Condor Spread

A condor spread is a non-directional options strategy that limits both gains and losses while seeking to profit from either low or high volatility. read more

Iron Condor

An iron condor involves buying and selling calls and puts with different strike prices when a trader expects low volatility. read more

Profit

Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity. Any profit that is gained goes to the business's owners. read more

Strap

Strap is an options strategy that uses one put and two calls with the same strike and expiration to profit on expectations of a large bullish move. read more

Strike Price

Strike price is the price at which a derivative contract can be bought or sold (exercised). read more