What Is a 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. When using calls, the strategy is termed a long call Christmas tree. It is a put Christmas tree when the trader uses put options.
The strategy is available long (bullish) or short (bearish).
This spread is essentially the combination of a long vertical spread and two short vertical spreads.
Key Takeaways
- 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 to 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 the price of the underlying asset and maxes when the underlying closes at the middle option strike price at options expiration.
- Maximum profit equals middle strike minus lower strike minus the premium.
- Maximum loss is the net debit paid for the strategy.
- Breakeven occurs at the lowest strike plus the premium paid or the highest strike minus half the premium.
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:
- Buy 1 call strike price 50.00
- Sell 3 calls strike price 54.00
- Buy 2 calls strike price 56.00
Long Christmas Tree With Puts
With this strategy, the holder is neutral to bearish. Sometimes referred to simply as a "put tree."
- 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.
- Maximum profit equals middle strike minus higher strike minus the premium.
- Maximum loss is the net debit paid for the strategy.
- Breakeven occurs at the lower strike plus half the premium paid or the highest strike minus the premium.
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 asset to make the strategy profitable. However, a larger move higher may also result in a profit.
- Sell 1 call strike price 50.00
- Buy 3 calls strike price 54.00
- Sell 2 calls strike price 56.00
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 bullish.
- 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.
FAQs
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 the Christmas tree market analysis? ›
Christmas Tree Market Insights
Global Christmas Tree Market size was valued at USD 7.33 billion in 2022 and is poised to grow from USD 7.68 billion in 2023 to USD 10.68 billion by 2031, growing at a CAGR of 5.52% in the forecast period (2024-2031).
What is Christmas tree concept? ›
In Christianity, the Christmas tree represents Jesus Christ's birth and resurrection. People think of the tree's branches and bushes as a sign of immortality because they look like Christ's crown of thorns on the cross. Also, people believe that each ornament on the Christmas tree has a special meaning.
What is the objective of the Christmas tree? ›
The Christmas tree, since ages, is believed to bring cheerfulness, positivity and the spirit of optimism in the otherwise soulless, dull and dreary weather of the winter season. The spirit of not giving up and staying green despite the tough weather conditions represents the positivity that the Christmas tree brings.
What is a 1/3/2 option strategy? ›
In its simplest state, a 1-3-2 trade is a long call (or put) butterfly with a sale of a call (or put) spread inside the butterfly. The sale of the call (or put) vertical is done to receive a credit to pay for the butterfly spread. A more detailed discussion of this strategy can be found in the Practicals HomeStudy Kit.
What is the Christmas tree option strategy? ›
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 the Christmas tree pattern distribution? ›
They follow the skin's cleavage lines, which on the upper chest and back produce a characteristic "christmas-tree" distribution. In 6% of cases an "inverse" distribution may occur, with rash mostly on the extremities. In children, presentation can be atypical or inverse, and the course is typically milder.
What is the logic behind Christmas tree? ›
Where did the modern Christmas tree originate? The modern Christmas tree originated in Germany, where families set up a paradise tree in their homes on December 24, the religious feast day of Adam and Eve. They hung wafers on it (symbolizing the Eucharistic host, the Christian sign of redemption).
What is the message of the Christmas tree? ›
Spiritual Meaning of a Christmas Tree
In Christianity, Christmas tree is symbolic of birth and resurrection of Jesus Christ. The tree's branches and shrubs are viewed as an emblem of immortality and are said to symbolize the crown of thorns worn by Christ on the cross.
What is an example sentence for Christmas tree? ›
Examples of Christmas tree in a Sentence
We hung the lights on the Christmas tree. These examples are programmatically compiled from various online sources to illustrate current usage of the word 'Christmas tree.
What is the moral of the story? The moral of the story is that if we help anyone in need, it seems that the help is done to Jesus himself and that will gain us the blessings of God.
What does the Christmas tree symbolize? ›
For many, the Christmas tree represents Jesus Christ's birth and resurrection. The tree branches and bushes are regarded as a sign of immortality and are thought to represent Christ's crown of thorns on the crucifixion.
What is the main objective of Christmas? ›
Christmas is an annual festival commemorating the birth of Jesus Christ, observed primarily on December 25 as a religious and cultural celebration among billions of people around the world.
What is the most successful option strategy? ›
A Bull Call Spread is made by purchasing one call option and concurrently selling another call option with a lower cost and a higher strike price, both of which have the same expiration date. Furthermore, this is considered the best option selling strategy.
What is the least riskiest option strategy? ›
The safest option strategy is one that involves limited risk, such as buying protective puts or employing conservative covered call writing. Selling cash-secured puts stands as the most secure strategy in options trading, offering a clear risk profile and prospects for income while keeping overall risk to a minimum.
What is the most complicated option strategy? ›
There are a number of volatile options trading strategies that options traders can use, and the reverse iron albatross spread is one of the most complicated. It's structured in a way that it can profit from a substantial movement in the price of an underlying security, regardless of which direction that movement is in.
How do you describe a Christmas market? ›
The “dictionary definition” is simply a collection of wooden stalls that sell traditional Christmas and seasonal foods & beverages, honey, jams, other delicacies, candy and chocolate, decorations, handmade toys, jewellery, and many other arts and crafts.
What is the economy of Christmas trees? ›
Multiplying the $80 to $100 price by the 15 million natural trees and 20 million artificial trees sold in 2022 means Christmas trees are roughly a $3 billion business annually — without including any extra money spent on the decorations.
What is the impact of Christmas market? ›
They can attract jobs, activities and visitors into local economies at a time when the usual visitor economy is less active. While they will not be suited to every area, they can be an effective tool to attracting people to your towns and cities, if designed correctly.
What is the trend for Christmas trees? ›
Modern Minimalism
For a fashionable and elegant appearance that radiates modern elegance, go for minimalist accents, geometric shapes, and sleek metallic embellishments. Accept the elegance of less is more and allow your tree's simple, minimalist design to make a big impression.
