Christmas Tree

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Christmas Tree

An investment strategy in which an investor buys a call option at a low strike price and then uses the proceeds from that sale to sell two call options at two different (but higher) strike prices. When one draws this strategy graphically, it vaguely resembles a Christmas tree. The calls have the same underlying security or asset; importantly, they must have the same expiration date. If the underlying moves modestly in the direction the trader wants, he/she can realize exceptional profits; however, if the underlying moves away from the trader, he/she has the possibility to lose a great deal. The staggered strikes for the two call options the investor sells are intended to hedge against loss in this situation.
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