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
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.
What is the concept of the Christmas tree? ›
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 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 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 deeper meaning of a 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 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 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 purpose behind a Christmas tree? ›
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 does Christmas symbolize? ›
Why do we celebrate Christmas? Celebrating the birth of Jesus Christ is more than a Christian holiday or Christian festival. It is more than an occasion to decorate our houses. It is an opportunity to pause and give thanks for the love, hope and joy found in Jesus – our Saviour and friend.
1. Bull Call Spread. A bull call spread strategy is driven by a bullish outlook. It involves purchasing a call option with a lower strike price while concurrently selling one with a higher strike price, positioning you to profit from an anticipated gradual increase in the stock's value.
What is the most risky option strategy? ›
Selling call options on a stock that is not owned is the riskiest option strategy. This is also known as writing a naked call and selling an uncovered call.
What is the 1% rule in options? ›
The 1% risk rule means not risking more than 1% of account capital on a single trade. It doesn't mean only putting 1% of your capital into a trade. Put as much capital as you wish, but if the trade is losing more than 1% of your total capital, close the position.
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 rule? ›
Traditionally, the Christmas tree should stay up until the 'Twelfth Night' (more on this, and the exact date of when that is, below). In modern times, however, Christmas decorations have got bigger and twinklier and spread all over the inside and outside of our homes.
What is the Christmas tree pattern distribution? ›
Pityriasis rosea patches and plaques usually follow the relaxed skin tension lines or cleavage lines (Langer lines) on both sides of the upper trunk. The rash has been described as looking like a Christmas tree in distribution.
What is the story behind the Christmas tree? ›
The Christmas tree was first recorded to be used by German Lutherans in the 16th century, with records indicating that a Christmas tree was placed in the Cathedral of Strasbourg in 1539, under the leadership of the Protestant Reformer Martin Bucer. The Moravian Christians put lighted candles on those trees."
What does a Christmas tree have to do with Jesus? ›
Then legend has it that a fir tree grew out of the fallen oak. "That became a symbol of Christ — being triangular in shape it represents the trinity — and from there came the idea that the tree should be a symbol of Christ and new life," Dr Wilson said.
What is the real meaning of the Christmas tree pagan? ›
Evergreens were also used as a sign of eternal life by early Christians in catacombs under Rome. But until the mid-19th century, Christians viewed the Christmas tree as a foreign pagan custom. Pagans would bring fir trees into their homes at Yuletide because it represented everlasting life and fertility.
What is the moral of the Christmas tree? ›
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.
