Christmas Tree Options Strategy - A Defined-Risk Setup for Advanced Traders

The christmas tree options strategy is a defined-risk setup that uses multiple strikes for targeted outcomes. A long christmas tree spread works best when the stock moves slightly. A short version needs a bigger move to profit. This guide covers call tree options, put tree options, and several real-life examples taken from our custom scan feature.

Key Takeaways

• The Christmas tree options strategy uses a 1-3-2 structure of calls or puts to create a defined-risk, defined-reward profile.
• Long Christmas trees work best when the trader expects a minimal to moderate move in the underlying stock.
• Short Christmas trees are designed for traders anticipating a larger directional move.

What is a Christmas Tree Options Strategy?

The christmas tree options strategy is a multi-leg trade built with either all calls or all puts, offering defined risk and limited reward. It uses six options with the same expiration and follows a 1-3-2 structure. For instance, in the long case you will buy 1 option, sell 3, then buy 2 further out (just replace “buy” with “sell” and “sell” with “buy” to have the short configuration instead). This setup is called a christmas tree spread because, on an options chain, it loosely resembles a tree (you will need to be creative to see it).

In the long case, both call tree options or put tree options strategies skip a strike and create a directional bias, similar to a butterfly but with a twist. Here is your typical P&L:

The short version also skips a strike, but it flips the payoff, looking like a reversed iron butterfly. You can see the short christmas tree P&L graph below:

Skipping one strike widens the risk profile and shifts the profit zone. It’s a way to express a more specific view without adding extra contracts.

• Long trees work best with slow, controlled moves
• Short trees need bigger, faster moves to hit payoff zones
• Margin and cost are relatively low due to limited exposure

The skipped strike is what makes this christmas tree options strategy unique and useful for traders with a defined price target in mind.

In general, if you’re choosing between a regular butterfly and a christmas tree strategy, your decision comes down to whether you prefer a balanced, symmetric payoff (butterfly) or a more directional setup with a skewed risk-reward profile (christmas tree).

Long Call Tree Options Strategy Explained

The long call version of the christmas tree options strategy involves buying 1 at-the-money call, selling 3 out-of-the-money calls, then buying 2 further out-of-the-money calls. This call tree options setup benefits from a small upside move and time decay. It works best in neutral to slightly bullish markets.

• Max profit happens if the stock closes at the short strike
• Max loss is the net cost of the strategy, which will mainly depend on the strike prices of the options involved
• Breakeven is either the lowest strike plus the net debit, or highest strike minus half the debit

This type of christmas tree spread limits both risk and reward in a clean structure.

Example: Long Call Tree Options

Let’s say IBM is trading at $249.20, and you think it’ll stay range-bound for the next couple of weeks. You can use a long call tree options strategy with a short-term expiration. For example, you could open a christmas tree options strategy by:

• Buying 1 call at $245
• Selling 3 calls at $255
• Buying 2 calls at $260

Your P&L profile would look as follows (notice that this is one of the limitless number of strategies you can build with our custom scan feature on the screener for the options market):

This setup would have a max loss under $300. Your max profit (over $700) happens if IBM closes at $255 on expiration. Breakeven points are around $247.66 and $258.67, so you have a relatively tight window to stay in the green (but you could say that IBM generally does not move that much).

One thing that stands out in this christmas tree options strategy is the asymmetric payoff. As IBM moves from the current price toward $255, profits build gradually. But if the price pushes past $255, your gains drop quickly. That’s the trade-off: you’re trading a narrow target zone for a low-cost, high-reward profile.

Long Put Tree Options Strategy Explained

The long put version of the christmas tree options strategy also uses a 1-3-2 setup with puts: buy 1 at-the-money put, sell 3 lower strike puts, then buy 2 even lower. Notice that the P&L profile of this christmas tree options strategy looks exactly like the one in the call case (you can find an example in the next subsection). 

Therefore, you will choose either a call or a put version entirely based on the prices you see in the option chain. Here is what you can expect with the long put tree options strategy:

• Max profit happens near the short put strike
• Max loss is the net cost of the strategy, which will mainly depend on the strike prices of the options involved
• Breakeven is either the highest strike minus the premium, or the lowest strike plus half the premium

Like the call tree options strategy, time decay helps this trade as long as the stock stays in range.

Example: Long Put Tree Options

Let’s stick with IBM, still trading at $249.20. If you expect the stock to stay range-bound for the next two weeks but prefer downside exposure, you could use a long put tree options strategy. Here’s how that christmas tree options strategy could look:

• Buy 1 $245 put
• Sell 3 $255 puts
• Buy 2 $260 puts

This structure mimics the payoff of a call tree options setup, with pretty much the same P&L profile shape:

In this case, your maximum loss would be slightly above $300, while your potential profit (if IBM lands exactly at $255 on expiration) would be just under $700.

What’s important is, once again, that the shape of the payoff is the same: a gradual gain up to the short strike, followed by a sharper drop if IBM falls too far. Compared to call tree options, this version works better when your bias is neutral to bearish.

That said, if the call version offers a cheaper entry or better reward-to-risk, it may be the smarter pick.

Short Christmas Tree Spread Using Calls

The short call version of the christmas tree options strategy involves selling 1 call, buying 3 higher calls, and then selling 2 even higher. This creates a net credit and profits from a large move in either direction, though the setup leans slightly bearish. The payoff is capped both ways.

• Max profit is the net credit received
• Max loss occurs if the stock stays near the middle strike
• Works best with high volatility or strong directional moves

Unlike a long call tree options trade, this version benefits when the stock moves away from the center of the christmas tree spread.

Example: Short Call Tree Options

Let’s say IBM is still trading at $249.20, but this time you expect a big move in either direction. You can use a short call tree options strategy with a longer expiration, like 6 weeks out. In this case, your christmas tree options strategy could look like this:

• Sell 1 $230 call
• Buy 3 $260 calls
• Sell 2 $280 calls

This setup creates a net credit and sets you up to profit if IBM makes a strong move either way. The P&L chart of your short call christmas tree strategy would be the following:

Your breakeven points are $242.31 and $268.85. The max loss is over $1,600 if IBM ends up near $260. But if it drops below $230, you could make more than $1,000. If it pushes above $280, your profit could exceed $2,000.

The P&L shape is clearly asymmetric. Your profit grows faster on the upside because you’re short fewer calls at the higher strike. 

Short Christmas Tree Spread Using Puts

The short put version of the christmas tree options strategy involves selling 1 put, buying 3 lower puts, and selling 2 even lower. This creates a net credit and leans slightly bullish, profiting most from small upward moves or minimal price change. The christmas tree spread has limited risk and capped returns.

• Max profit is the net credit received
• Max loss occurs if the stock drops sharply
• Best used when expecting a stable or mildly rising market

Unlike call tree options, this setup favors a flat to slightly bullish bias while using the same defined-risk structure as put tree options.

Example: Short Put Tree Options

As you can guess, you can replicate the short strategy with puts. Let’s use IBM again, currently trading at $249.20, and assume you believe the stock will soon move sharply in either direction. You could set up a short christmas tree with puts using a 6-week expiration. The structure would be:

• Sell 1 $230 put
• Buy 3 $260 puts
• Sell 2 $280 puts

The P&L chart of your short put christmas tree strategy will look familiar:

This version of the christmas tree options strategy creates a net credit and profits if IBM moves far enough away from the middle strikes. Your max loss is still over $1,600, and it happens if IBM ends up near $260. On the flip side, you could earn more than $1,000 if IBM drops below $230, or over $2,000 if it rallies past $280.