Christmas Tree

Christmas Tree

An options trading strategy that is generally achieved by purchasing one call option and selling two other call options at different strike prices. When drawn structurally, the strike price of the long option is located below the two successively higher written calls.

Notes:

This strategy would be used if the investor believed the stock was going to make a calculated move higher. It is a variation of the ratio spread, so a significant upward move in the stock price will result in a very large loss due to the extra short call. Having staggered strike prices for the written calls in the Christmas tree strategy, rather than at the same strike in the ratio spread, reduces the amount of loss incured when the share price rises more than expected.

See also: Call, Exercise Price, Option, Ratio Spread