Christmas tree

Your thoughts might turn to pretty lights and the smell of pine, but in this case, the Christmas Tree is an options trading strategy. It gets its name because the options purchased come in groups of one, three, and two. Line those up and...it sorta kinda looks like a tree. Narrow on top, thick in the middle, with a trunk on the bottom. And calling it a "Christmas Tree" is more festive than "Tree Strategy."

The Christmas Tree set up can be created with either puts or calls, meaning you can have a bear version or a bull version. We'll give an example with calls, which would represent a bullish bet.

The investor buys a call with an at-the-money strike price. They skip the next strike price. The investor then sells three calls at the next strike price. The last piece is buying two more calls at the next level strike price.

So, once again, here's the game plan:

- Buy a call @ strike price #1
- Skip over strike price #2 altogether
- Sell three calls at a 3rd price
- Buy two calls at a 4th strike price

The 1st and 3rd calls are a long spread, with with the 3rd and 4th being a short spread. All of these options have the same expiration date, but staggered strike values. The kicker here is that, if the stock rises above the 3rd price, the profit you’ll see will decline because there isn’t enough time between the 3rd and 4th strikes to gain value.

This is usually done in a bull (rising) market with the hope that, by staggering out the strikes, the investor can gain between each.