Short Christmas Tree with Calls, Puts: Options Trading Strategy

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.

Click to read more ...