We introduced a handful of trading picks that utilized a couple of new advanced options trading strategies, in the Options Picks section of our members area, this week. The two new strategies we speak of are the Short Christmas Tree with Calls and the Short Christmas Tree with Puts. In our estimation, current market conditions are perfect for this kind of options strategy and as such we find it a timely inclusion to the strategies that we cover in our Options Picks section.

Now, not all of you might be familiar with the Short Christmas Tree strategy, which can be considered an intermediate to advanced strategy, so here's a primer to help provide a bit of an understanding. A more in-depth study of the strategy will be provided at another time and date (perhaps you've heard of the new Options Theory and Practice classes that we will be launching in the near future).

Short Christmas Tree with Calls:

Short Christmas Tree with CallsThis variant (seen on the right) is constructed using Calls, as the name suggests, and it is a bullish options strategy that also provides the trader with a modicum of safety, in the event the underlying stock actually falls in value.

The strategy is constructed as follows:

Low strike, Short Call: A short position is taken in a call option; most usually, one that is in-the-money.

Middle strike, Long Call: A long position is taken in a call option on a higher strike price; often, one that is at-the-money.

High strike, Long Call: A long position is taken in a call option on an even higher strike; usually, one that is out-of-the-money.

The distance between the first and second strikes and that between the second and the third strikes is typically the same. 

When a trader uses this strategy, he/she is expecting a sharp move in the stock, and his/her strong hunch is that such a move will be to the upside.

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Over the weekend, we'd mentioned that we were going to provide a series of short educational articles this week, covering the Long Strip options strategy.

We'll start off the series with an illustration.

The Russell-2000 iShares (IWM) are trading at 35.00 at the moment. The fact that the ETF is sitting nearly precisely at a widely traded strike (as well as the fact that IWM options are amongst the most liquid options overall) means that this would not be a bad point at which to consider a strategy such as a Strip.

The technicals are as important of course and since this is not an educational piece on technical analysis per se, let's just say that the technicals basically point to the probability of a continuing bearish environment on the ETF for the next few sessions, but with the potential for a huge dead cat bounce, at any point. As we'll see later in the series, the Long Strip strategy would do well given either a continued drop or an abrupt bullish reversal.

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