On the eve of Christmas we bring about a new term which goes by the name of Christmas Tree Options Strategy which is an options trading strategy that is generally achieved by undertaking the following actions:
- One has to purchase one call option.
- One has to sell two other call options at different strike prices.
It forms something similar to a Christmas tree when the above strategies are drawn structurally as the strike price of the long option is located below the two successively higher written calls.
When Christmas Tree Options Strategy is Used?
Christmas Tree Options Strategy is used when an investor believes a stock is going to make a 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. The staggered strike prices for the written calls in the Christmas tree strategy reduce the amount of loss incurred when the share price rises more than expected, unlike the ratio spread, where the call options have the same strike.
However somehow we are not convinced in suggesting a retail trader to go for options as it is best suited for high net worth individuals and you must check out our write-up on the subject that why retail traders should not trade options to preserve your capital.