Christmas Tree Option Strategy
What are the characteristics of this option strategy?
The Christmas Tree Option Strategy is a neutral options strategy that can be built by both call and put options positions with different strikes but the same expiration dates for a neutral to bullish forecast. Strategy could be executed by buying 1 ATM call option, selling 3 OTM call options and buying 2 deep OTM call options. The strategy’s main goal is to take advantage of a sideways or range-bound market as it attempts to take advantage of fluctuations in volatility. The strategy does not require huge capital outlay beyond buying the options and can be used to cheaply hedge a portfolio or generate income.
Is this a bullish, bearish or neutral strategy?
The Christmas Tree option strategy is a neutral strategy.
Is this a beginner or an advanced option strategy?
The Christmas Tree Option strategy is considered an advanced option strategy It requires a knowledge of option pricing and the option Greeks.
In what situation will I use this strategy?
The Christmas Tree option strategy is used when the investor is expecting the underlying stock to have volatile swings but stay within a particular range. The strategy capitalizes on fluctuations in volatility by combining both call and put option positions.
Where does this strategy typically fall in the range of risk-reward and probability of profit?
The risks and rewards of the Christmas Tree strategy depend on the stock’s price movement and the time left before the options expire. The maximum reward is achieved when the stock price ends up exactly at the center of the range and the maximum loss is achieved when the stock’s price moves beyond the limits of the range. The probability of profit for the strategy is moderate.
How is this strategy affected by the greeks?
The Greek Sensitivity of the Christmas Tree Option Strategy can vary and is affected by the movement of the underlying stock price and the time left before the expiration. Delta and Gamma are the two most important Greeks for the Christmas Tree Option Strategy as they measure the sensitivity of the option’s price to the movement of the underlying stock.
In what volatility regime (i.e VIX level) would this strategy be optimal?
This strategy is most profitable when there is a large enough difference between implied volatility and realized volatility. The strategy works best when there is more time left before the expiration date and when volatility is within the range of 30-40%.
How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?
If the trade goes against the investor, there are a few ways to adjust the strategy. One way is to add in a Bull Calendar Spread or a Bear Calendar Spread. The Christmas Tree Option Strategy is relatively easy to adjust compared to other strategies and can be adjusted in short amounts of time.
Where does this strategy typically fall in the range of commissions and fees?
The commissions and fees for the Christmas Tree Option strategy depend heavily on the broker. Generally speaking, most option brokers will charge a per-contract fee and a per-trades commission as well. Considering this strategy requires trader to buy sell 6 call options, commission is a bit on higher side.
Is this a good option income strategy?
The Christmas Tree Option Strategy can be used to generate income but it is not the most optimal strategy for this purpose. There are other option income strategies such as covered call writing that are better for generating income.
How do I know when to exit this strategy?
When exiting a Christmas Tree Option Strategy, the investor needs to consider the overall risk/reward and the current market conditions. The position should be exited when the potential reward no longer outweighs the risk.
How will market makers respond to this trade being opened?
Market makers typically respond to the setup of a Christmas Tree Option Strategy by making sure that the underlying stock is not overpriced. Once the trade is opened, the market makers will adjust their hedging positions to match the new position.
What is an example (with calculations) of this strategy?
Consider a stock trading at a price of $260. A trader can execute christmas tree option strategy by buying 1 call at $260, selling 3 call option at $270 and buying 2 call options at $275. The investor enters this trade by paying a net premium of $360. If the stock stays between $260 to $270 at expiration, the investor will make a maximum profit of $464. If the stock breaks the range, the investor will make a maximum loss of $360.
How can MarketXLS help?
MarketXLS is a powerful tool for traders and investors for analyzing and trading options. MarketXLS enables traders to find and analyze options trades easily, with features such as options chains, greeks, implied volatility and custom alerts. MarketXLS also allows traders to quickly place orders, adjust positions and track their open trades with the ability to monitor multiple accounts. With MarketXLS, traders can analyze their options trades quickly and with the confidence of an experienced trader.
Here are some templates that you can use to create your own models
Christmas Tree Spread With Puts Option Strategy
Christmas Tree Spread With Puts Option Strategy
Search for all Templates here: https://marketxls.com/templates/
Relevant blogs that you can read to learn more about the topic