Put Christmas Tree Spread

The Put Christmas Tree Spread is a structured, multi-leg options strategy designed to profit from a slight decline in the price of the underlying asset. It balances cost-efficiency with a defined risk and reward profile. Like its name suggests, it arranges multiple strike prices in a “tree” configuration—wider at the base with narrowing potential as prices move beyond key points.

Structure

• Buy 1 Put at Strike A (lowest strike)
• Sell 2 Puts at Strike B (middle strike, near current price)
• Sell 1 Put at Strike C (highest strike, furthest out-of-the-money)

All options must share the same expiration date. Strike selection defines your risk and reward zones.

Profit & Loss Profile

• Maximum Profit: Occurs when the underlying settles at Strike B (the short middle puts)
• Maximum Risk: Limited to the net debit paid (or reduced by net credit received)
• Profit Zone: Between Strike A and Strike C, with the sweet spot near Strike B
• Breakeven Points: Can be calculated by factoring the net premium and the distance between strikes

Example

Suppose a stock is trading at $100. A trader constructs the following:

• Buy 1 x $95 Put
• Sell 2 x $100 Puts
• Sell 1 x $105 Put

If the stock closes at $100, both sold puts expire worthless, and the purchased $95 put has minimal intrinsic value. The trader profits most if the stock closes right near $100, where time decay and limited movement align with the short positions.

Ideal Market Conditions

• Outlook: Mildly bearish with low probability of a sharp drop
• Implied Volatility: Preferably low to moderate
• Time Horizon: Short to medium term
• Goal: Capture premium with limited downside risk

Risk Considerations

• Requires margin due to multiple short legs
• Potential loss if stock drops well below Strike A
• Breakeven calculation can be complex and depends on premiums and strike distances
• Not ideal in volatile markets with unpredictable drops

Summary

This strategy suits traders looking for income with defined downside risk when markets show signs of mild bearishness. It offers customization via strike selection and can be adapted into ratio spreads or modified wings for greater flexibility.