Christmas Tree Options Strategy
Christmas Tree Options Strategy are advanced spread strategies using the purchase and sale of six options. It can be built either with call or put options. This strategy involves different strike prices but the same expiration for the options bought and sold.
Christmas Tree payoffs using puts (1) and calls (2):
Christmas Tree Strategy is usually a neutral or slightly bullish directional strategy. Additionally, traders buying this strategy expect a little volatility until expiration.
Example of long Christmas Tree with call options:
ABC stock is currently trading at $100
- Buy 1 call with K = $100 and Dec21 expiry
- Sell 3 calls with K = $110 and Dec21 expiry
- Buy 2 calls with K = $115 and Dec21 expiry
Example of long Christmas Tree with put options:
ABC stock is currently trading at $100
- Buy 1 put with K = $100 and Dec21 expiry
- Sell 3 puts with K = $90 and Dec21 expiry
- Buy 2 puts with K = $85 and Dec21 expiry
Christmas trees are like butterfly spread strategies without a strike price. For example, a regular butterfly on ABC stock would imply 100, 105, 110, and 115 strike prices. The corresponding Christmas tree would imply only 100, 110, and 115 strike prices.
