Christmas Tree Spread
Bullish StrategyUse Zuviz's free options visualizer to build this strategy instantly. A modified ratio spread using calls at three different strikes. Named for its tree-like payoff shape with a peak at the middle strike.
⚡ Key Takeaways
- Market Outlook: Moderately bullish or bearish (asymmetric)
- Max Profit: Occurs at middle short strike
- Max Loss: Net debit paid (defined risk)
- Breakeven: Between long and short strikes
- Best for: Directional bias with defined risk, selling volatility
- Greeks Impact: Complex (ratio spread variant), negative Vega
💡 Visualize this strategy in 10 seconds: Open Zuviz →
📊 Payoff Diagram
Create your own interactive diagram →
🏗️ Strategy Structure
A Christmas Tree Spread (Call version) uses 3 strikes with a 1:3:2 ratio.
| Leg | Action | Type | Strike | Qty | Premium |
|---|---|---|---|---|---|
| 1 | Buy | Call | $100 (Lower) | 1 | $6.00 |
| 2 | Sell | Call | $105 (Middle) | 3 | $3.50 |
| 3 | Buy | Call | $110 (Higher) | 2 | $1.50 |
Net Cost: $6.00 - (3 × $3.50) + (2 × $1.50) = -$1.50 (Credit)
🧮 Key Calculations
🎯 When to Use This Strategy
- Moderately bullish: Expect stock to rise to a specific target
- Low cost entry: Often entered for a credit or small debit
- High IV: Benefits from selling multiple options at higher prices
- Income with upside: Collect premium while maintaining profit potential
📈 Greeks Impact
Delta (Δ)
Near Zero - You want the stock to stay still.
Theta (Θ)
Positive - Time decay is your best friend here.
Vega (ν)
Negative - You want volatility to decrease (IV Crush).
⚖️ Pros & Cons
Pros
- Low or no upfront cost
- Defined risk profile
- Benefits from time decay
- Good reward-to-risk ratio
Cons
- Limited profit potential
- Complex to manage (6 contracts)
- Needs precise price target
- Assignment risk on short calls
📝 Real-World Example
Variation of butterfly with different strikes to tilt the risk/reward.