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 pattern in stocks? ›
A Christmas tree spread with calls is an advanced options strategy that consists of three legs and six total options. The option strategy involves buying one call at strike price A, skipping strike price B, selling three calls at strike price C, and then buying two calls at strike price D.
What people put on their Christmas tree answer? ›
Today, there is a wide variety of traditional and modern ornaments, such as garlands, baubles, tinsel, and candy canes. An angel or star might be placed at the top of the tree to represent the Angel Gabriel or the Star of Bethlehem, respectively, from the Nativity.
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 the Christmas tree rule? ›
Tradition dictates that Christmas trees should be put up at the beginning of Advent, which begins on the fourth Sunday before Christmas. This year, Advent begins on Sunday 3rd December 2023.
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 meaning of the Christmas tree? ›
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 does Christmas tree teach us? ›
Symbol of Eternal Life
The legend also has that after the birth of Jesus Christ in the winter season, some of the trees shook off the snow and turned green to mark the great event. Thus, the Christmas tree represents permanence and immortality.
What is the most common thing to put on a Christmas tree? ›
The most popular Christmas tree décor includes ornaments, lights, garlands, and tree toppers. Ornaments are often personalized or themed, while lights can be clear or multi-colored.
What is the Christmas tree problem? ›
Christmas tree syndrome encompasses a spectrum of health issues triggered by exposure to the allergens residing on live Christmas trees. For those who are sensitive to allergens, prolonged exposure to live Christmas trees can lead to respiratory and skin health issues.
The smart way to invest in Christmas trees is probably a timberland REIT. A timberland REIT owns real estate forest land, to which it can sell logging rights — or the right to send the Griswolds hiking into the woods to find a good, old-fashioned family Christmas tree. .
What is the Christmas tree effect? ›
The Christmas Tree Effect occurs when we continue adding new features to a system (like ornaments on a tree) and eventually end up hurting the overall system, even if each individual new feature is a positive.
What is the most sustainable Christmas tree option? ›
Pros: A live tree is the most sustainable option if you want a fresh tree. Cons: Most live trees can only survive indoors for 7-10 days before they begin to suffer. Not all live tree species are appropriate for our climate.
What is the strategy for Christmas tree lights? ›
Instead of wrapping the lights around the tree from top to bottom, hang Christmas tree lights vertically. Mentally divide the tree into three triangular sections. String lights by starting the string at the bottom of the tree and pulling it up to the top, then back down like a mountain.
What are Christmas tree tips? ›
Keep trees away from major sources of heat (fireplaces, heaters, heat vents, direct sunlight). Lowering the room temperature will slow the drying process, resulting in less water consumption each day. Use of lights that produce low heat, such as miniature lights, will reduce drying of the tree.
