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Christmas Tree Spread with Puts Strategy

The Christmas Tree Spread with Puts Strategy is advanced because the cost is high with three strike prices, six options. They also have multiple commission and bid-ask spread. With this, we can open and close the position at a good price per contract commission rate. So the profit is realized if the stock price is at the strike price of short puts expiration. The forecast can be neutral as bullish or bearish depending on the relationship of the stock price. As the stock price comes near the strike price of the short put the new position is established and then the forecast is unchanged. If the stock price is below the strike price of short puts when the position is established, then the forecast must be for the stock price to rise to that strike price at expiration. If the stock price is above the strike price of short puts when the position is established the forecast must be for the stock price to fall towards strike price at expiration.

The cost of these is higher than the butterfly spread. The range of profitability for a Christmas tree is wide for a butterfly. Christmas tree will differ from skip-strike butterfly spreads. They have low-profit potential than skip-strike butterfly spread with lower risk. The long put tree has no risk of assignment and the short put has risk. The short puts that are assigned on the ex-dividend date. The strategy with the put is for choice when the forecast is done near a strike price of the shot put. They are different from standard butterfly spreads in two ways.

Example

If ABC is trading $110 and it is expected to trade lower over the next three months. Then the trader could execute a 110/100/95 Christmas tree spread by buying one 110-strike price put, and selling three 100-strike price puts. Then buying two 95-strike price puts for the following prices:

Conclusion

The lower a trader set the strike prices more bearish. Christmas tree spread becomes at the same time and reduces the cost of a trade. If the strike prices are lower they are set at a lower probability of success. This type of spread is sensitive to changes in volatility. The net price of spread is dropped when the volatility rises and price increases when implied volatility falls. They have an inverse relationship to imply volatility changes. This strategy is not good for a beginner so an experienced trader should execute a Christmas tree spread options strategy.