Christmas Tree Options Strategy
What Is a Christmas Tree Options Strategy?
A Christmas tree is an options trading spread strategy accomplished by buying and selling six call (or six put) options with various strikes yet a similar expiration dates for a neutral to bullish forecast. This is named a long call Christmas tree while utilizing calls or a put Christmas tree while utilizing put options.
The strategy is accessible long (bullish) or short (bearish).
This spread is basically the combination of a long vertical spread and two short vertical spreads.
How Christmas Trees Work
The Christmas tree name comes from the strategy's extremely loose likeness to a tree when seen on an options chain display. The association is questionable, best case scenario.
Christmas trees are like butterfly spreads in that they utilize different vertical spreads to enclose an ideal possible return. The difference is that one of the strike prices is skipped, which presents a directional bias.
For example, in the event that a condor spread included the 50-55-60-65 strikes, the relating Christmas tree would include just the 50-55-65 strikes (skirting the 60 strike).
The standard, or long Christmas tree with calls (once in a while alluded to just as a "call tree"), includes buying one call option with a at-the-money strike, skirting the next strike, and afterward selling three options with the accompanying strike. At last, buy two additional calls with the next higher strike. The 1-3-2 structure probably shows up 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 happens at the most reduced strike plus the premium paid or the highest strike minus half the premium.
Time decay is on the holder's side as the holder needs all options with the exception of the most reduced to terminate worthless.
Models
Long Christmas Tree With Calls
For instance, 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. At times alluded to just 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 happens at the lower strike plus half the premium paid or the highest strike minus the premium.
Maximum loss is the premium paid to start the strategy.
Short Christmas Tree With Calls
Short strategies ought to bring about a net credit to the account when initiated. This strategy profits when the underlying asset moves by a base course in one or the other heading however it is capped. The bias is bearish on the grounds that it doesn't take a very remarkable move lower in the underlying asset to make the strategy profitable. In any case, a bigger move higher may likewise bring about 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 brings about a net credit to the account and profits when the underlying moves by a base in one or the other course. Profits come faster with a smaller upside move albeit a bigger downside move would likewise be profitable. Accordingly, this strategy inclines 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.
Features
- Christmas trees can be built with either all calls or all puts and might be structured as either long or short.
- A Christmas tree is an options spread strategy that includes 6 call (or put) options: buying one ATM call (put) selling 3x calls (puts) two strikes out of the money and afterward buy 2x more call (put) three strikes out of the money.
- This strategy pays off with a neutral to somewhat bullish outcome in the underlying security.
