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Christmas Tree Spread with Calls Strategy

The Christmas Tree Spread with Calls Strategy is the combination of a long vertical and two short vertical spreads. The strategy pays off with a neutral bullish outcome in the underlying security. They are constructed with all calls, puts and structured as long or short. strategy is an option spread position using multiple long and short options at different strike prices. The spread gets the name from its P&L graph because the spread constructs the diagram that resembles the shape of a Christmas tree. The spread is attempting to trade a market with a slight directional bias. If one is bullish a market could use a these composed of call options.

The net price of a stretegy falls when the volatility rises. Traders open a long Christmas tree spread when they forecast implied volatility fall. The potential profit is high in percentage and risk is limited if the stock price rises or falls. They will not rise in value and not show much of a profit until it is close to expiration. Costs are higher versus a standard butterfly spread due to the long upper legged strike price that is further away from the short middle strikes. The position is opened at a higher cost than stock must move lower to become profitable. It does have a higher probability of a loss in stock does move against the trader, losses are capped at the opening price.

Profit

The maximum profit equals middle strike minus lower strike minus the premium.

Loss

The maximum loss is net debit paid for the strategy.

Breakeven

It occurs at a lower strike plus the premium paid or highest strike minus the half premium. Time decay is on the holder's side as the holder wants all options except the lowest to expire worthlessly.

Examples

Long Christmas tree with call the underlying asset at $ 50.
Buy 1 call strike price 50, sell 3 calls strike price 54, and Buy 2 calls strike price 56.

Conclusion

The lower a trader sets the strike price as more bearish a these becomes, while at the same time. The lower the strike prices are set lower the probability of success. This type of spread is sensitive to changes in implied volatility. The net price of the spread drops then implies volatility rises and price increases when implied volatility falls as an inverse relationship to implied volatility changes. The trader who executes this trade wants a drop to implied volatility. The strategy not recommended for a beginner it is for an experienced trader that should execute a Christmas tree spread options strategy.