Call Christmas Tree Spread Strategy

The Call Christmas Tree Spread is an advanced, multi-leg options strategy designed to profit from minimal upward movement in the underlying asset. It uses a 1-3-2 ratio of call options at different strike prices but with the same expiration date. This structure resembles a “tree” on the options chain and offers a defined risk-reward profile with a slightly bullish bias.

Structure

• Buy 1 call at lower strike (ATM)
• Sell 3 calls at middle strike (skip one strike above)
• Buy 2 calls at higher strike (two strikes above ATM)
• All options share the same expiration date

Profit & Loss Profile

• Max Profit: Achieved if the stock closes at the middle strike at expiration
• Max Loss: Limited to the net debit paid to enter the trade
• Breakeven Points: Lower strike + net debit and upper strike - half the net debit

Ideal Market Conditions

• Neutral to slightly bullish outlook
• Expecting low volatility or range-bound movement
• Best when implied volatility is high at entry and expected to decline

Example

A stock is trading at $50. You:

• Buy 1 call at $50 for $3
• Sell 3 calls at $54 for $2 each
• Buy 2 calls at $56 for $1 each

Net debit = $3 - $6 + $2 = $1. Max profit occurs if the stock closes at $54. Breakeven points are $51 and $55.5.

Risks & Considerations

• Requires precise price targeting for max profit
• Assignment risk on short calls if in-the-money
• Time decay and volatility shifts can impact profitability