Sometimes referred to simply as a "put tree." Buy 1 put strike price 50.00 Sell 3 puts strike price 46.00 Buy 2 puts strike price 44.00 Maximum profit is at an underlying asset price of 48.00 at expiration. Maximum profit equals middle strike minus higher strike minus the premium. Maximum loss is the net debit paid for the strategy.
Why is patience required for Christmas tree spreads?
What is a long Christmas tree spread?
How does a Christmas tree spread differ from a butterfly spread?
When does the net price of a Christmas tree spread fall?
Does a Christmas tree spread have a positive theta?
Do short puts have early assignment?
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About this website
What is a put strategy?
A put is a strategy traders or investors may use to generate income or buy stocks at a reduced price. When writing a put, the writer agrees to buy the underlying stock at the strike price if the contract is exercised. Writing, in this case, means selling a put contract in order to open a position.
What is a butterfly trade?
A long butterfly spread with calls is a three-part strategy that is created by buying one call at a lower strike price, selling two calls with a higher strike price and buying one call with an even higher strike price. All calls have the same expiration date, and the strike prices are equidistant.
What is a bullseye trade?
Bullseye Trades is a swing-trading service by Jeff Bishop. He sends one trade idea per week to subscribers on Monday via email. You also get updates via the Raging Bull App and find a video update within the Raging Bull dashboard.
What is an AXE trade?
What Is an Axe? An axe (or "axe to grind") is the interest that a trader shows in buying or selling a security that is typically already on the books. If a trader holds a long position but has short-term concerns, that trader's axe toward short-term put options may be significant.
How do you butterfly trade?
The most basic form of a butterfly spread involves buying one call option at a particular strike price while simultaneously selling two call options at a higher strike price and buying one other call option at an even higher strike price.
When should you trade a butterfly?
Forty-five days to expiration is optimal. Anywhere between 30-60 days left to expiration is a great time to be entering these trades. A Butterfly is made up of two Short Calls at-the-money. Long calls should be at or near the expected move.
How do butterfly farmers make money?
Single specimens can run anywhere from $1 to $7. You don't even necessarily need to focus on selling full-grown butterflies. For instance, you could also make money by hawking eggs, caterpillars or chrysalises.
Is butterfly a good option strategy?
One strategy that is quite popular among experienced options traders is known as the butterfly spread. This strategy allows a trader to enter into a trade with a high probability of profit, high-profit potential, and limited risk.
What is a call tree?
The regular, or long Christmas tree with calls (sometimes referred to simply as a "call tree"), involves buying one call option with an at-the-money strike, skipping the next strike, and then selling three options with the following strike. Finally, buy two more calls with the next higher strike. The 1-3-2 structure supposedly appears as a tree.
What is a Christmas tree?
A Christmas tree is an options trading spread strategy achieved by buying and selling six call (or six put) options with different strikes but the same expiration dates for a neutral to bullish forecast. This is termed a long call Christmas tree when using calls or a put Christmas tree when using put options. ...
How do Christmas trees work?
How Christmas Trees Work. The Christmas tree name comes from the strategy's very loose resemblance of a tree when viewed on an options chain display. The connection is tenuous, at best. Christmas trees are similar to butterfly spreads in that they use multiple vertical spreads to box in a desired potential return.
When should you put up your Christmas tree?
Traditionally, a Christmas tree would be put up to mark the beginning of Advent which is a time of celebration, anticipating Christ's birth. Advent starts four Sundays before Christmas day meaning it falls on the 28th of November this year.
Is it bad luck to put up a Christmas tree early?
The superstition around it being bad luck to put up a tree before December stems from Catholic tradition. However, this superstition has started to hold less sway in recent years.
How to make a tree guard?
You can create your own very effective, homemade tree guards by using a couple of two-liter plastic soda bottles. First, cut off the tops and bottoms of the bottles. Then, make a slit lengthwise to cut them open. For smaller trees, the plastic soda bottles can wrapped around the base of the tree and secured with wire or rope. Stack two or more bottles on top of one another for full coverage. For maximum support, make holes in the plastic, tie string through them, and secure the string to a sturdy stake in the lawn. These types of tree guards are effective against small rodents and pests as well as weather conditions and equipment damage.
What is the best way to protect a tree from a tree?
Check your guard frequently to ensure it is not constricting the tree. 1. Plastic Base Guard Tubes. The most popular types of tree guards are the plastic ones installed around the base of a tree. These simple tree guards usually have plastic latches or connectors that allow them to be easily fixed into place.
How to secure burlap around a tree?
Burlap is not effective against any equipment damage. Secure burlap around the base of your tree by tying with twine or rope. Readjust your rope occasionally so that the burlap does not become too constricting as your tree grows. Burlap blends in with bark, so it is hardly noticeable from a few feet away.
What is field tile?
Field tiles are a plastic sleeve that is usually used to wrap or protect pipes. However, in recent years, many orchard growers and tree farmers have adapted them for use as tree guards. They are relatively inexpensive and can be cut to any length needed. Field tile will typically protect trees from severe weather, animals, and equipment damage. They are easily installed and can be secured with nylon rope or a wire wrapping. Some types of field tile pipe coverings also come with latches or snaps that can be used instead of wrapping. The bottom edge of the field tile should extend five centimeters into the ground for maximum support and protection. Dig a small trench around the tree, or simply wiggle the field tile into the ground if it is soft.
How to secure soda bottles to a tree?
For smaller trees, the plastic soda bottles can wrapped around the base of the tree and secured with wire or rope. Stack two or more bottles on top of one another for full coverage. For maximum support, make holes in the plastic, tie string through them, and secure the string to a sturdy stake in the lawn.
How is paper wrapped around a tree?
The paper is wrapped around the tree and secured with twine or rope. Adjust the ropes occasionally to ensure the paper is not becoming too tight.
Why is my tree cracking in the summer?
Tip: The metal will attract a lot of heat during the summer. The tree's bark will absorb it, which could cause cracking. As a basic rule of thumb, steer clear of dark colored tree guards that will conduct heat since the tree will end up absorbing it.
Why is patience required for Christmas tree spreads?
Patience is required because this strategy profits from time decay, and stock price action can be unsettling as it rises and falls around the strike price of the short puts as expiration approaches.
What is a long Christmas tree spread?
A long Christmas tree spread with puts can also be described as the combination of a “wide” bear put spread and two “narrow” bull put spreads. In the example above, the wide bear put spread is comprised of the long 110 Put and one of the short 100 Puts.
How does a Christmas tree spread differ from a butterfly spread?
They differ from standard butterfly spreads in two ways. First, the cost of a Christmas tree spread is higher than that of a butterfly spread. Second, the range of profitability for a Christmas tree is wider than for a butterfly. Christmas tree spreads also differ from skip-strike butterfly spreads.
When does the net price of a Christmas tree spread fall?
The net price of a Christmas tree spread falls when implied volatility rises and rises when implied volatility falls. Consequently some traders open long Christmas tree spreads when they forecast that implied volatility will fall.
Does a Christmas tree spread have a positive theta?
A long Christmas tree spread with puts has a net positive theta as long as the stock price is near the strike price of the short puts. If the stock price moves away from this strike price, however, the theta becomes negative as expiration approaches.
Do short puts have early assignment?
While the long puts in a long Christmas tree spread have no risk of early assignment, the short puts do have such risk. Early assignment of stock options is generally related to dividends. Short puts that are assigned early are generally assigned on the ex-dividend date.
Goal
Explanation
- A long Christmas tree spread with puts is a three-part strategy involving six puts. If there are four strike prices, A, B, C and D, with D being the highest, a long Christmas tree spread with puts is created by buying one put at strike D, skipping strike C, selling three puts at strike B and buying two puts at strike A. All puts have the same expir...
Maximum Profit
- The maximum profit potential is equal to the difference between the highest strike price (long put) and the strike price of the three short puts minus the initial net debit including commissions. This profit is realized if the stock price is at the strike price of the short puts at expiration. In the example above, the difference between the highest strike price and the strike price of the short p…
Maximum Risk
- The maximum risk is the net cost of the strategy including commissions, and there are two possible outcomes in which a loss of this amount is realized. If the stock price is above the highest strike price at expiration, then all puts expire worthless and the full cost of the strategy including commissions is lost. Also, if the stock price is below the lowest strike price at expiratio…
Breakeven Stock Price at Expiration
- There are two breakeven points. The upper breakeven point is the stock price equal to the highest strike price minus the cost of the position including commissions. In the example above, the highest strike is 110 and the cost of the position is 3.35. The upper breakeven point at expiration, therefore, is 106.75 (110.00 − 3.25). The lower breakeven point is the stock price equal to the lo…
Appropriate Market Forecast
- A long Christmas tree spread with puts realizes its maximum profit if the stock price is at the strike price of the short puts at expiration. The forecast, therefore, can either be “neutral,” “modestly bullish” or “modestly bearish” depending on the relationship of the stock price to the strike price of the short puts when the position is established. If the stock price is at or near the …
Strategy Discussion
- A long Christmas tree spread with puts is the strategy of choice when the forecast is for stock price action near the strike price of the short puts, because long Christmas tree spreads profit primarily from time decay. They differ from standard butterfly spreads in two ways. First, the cost of a Christmas tree spread is higher than that of a butterfly spread. Second, the range of profitab…
Impact of Stock Price Change
- “Delta” estimates how much a position will change in price as the stock price changes. Long puts have negative deltas, and short puts have positive deltas. The net delta of a Christmas tree spread remains close to zero until two weeks or so before expiration. As expiration approaches, if the stock price is below the lowest strike price in a long Christmas tree spread with puts, then the ne…
Impact of Change in Volatility
- Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices. As volatility rises, option prices tend to rise if other factors such as stock price and time to expiration remain constant. Long options, therefore, rise in price and make money when volatility rises, and short options rise in price and lose money when volatility rises. …
Impact of Time
- The time value portion of an option’s total price decreases as expiration approaches. This is known as time erosion. “Theta” is a measure of how much time erosion affects the net price of a position. Long option positions have negative theta, which means they lose money from time erosion, if other factors remain constant; and short options have positive theta, which means th…