Christmas Tree Call
Buy one ATM call and sell two OTM calls at different higher strikes. A bullish strategy with capped profit and risk above the highest strike.
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What is a Christmas Tree Call?
A Christmas tree call spread (also called a ladder or tree spread) is a modified bullish strategy. You buy one at-the-money call, sell one out-of-the-money call at a higher strike, and sell another call at an even higher strike. The name comes from the shape of the payoff diagram — it looks like a lopsided tree.
This trade is bullish but not aggressively so. You want the stock to rise to the first short strike, where you capture max profit. Beyond that, your profit starts to decline and eventually turns into a loss if the stock rises too far. It is a "right amount of bullish" strategy — you make money if the stock goes up, but not too much.
How to Set It Up
- Buy 1 ATM call at strike A (near the current price)
- Sell 1 OTM call at strike B (higher)
- Sell 1 further OTM call at strike C (even higher)
- All same expiration
- Strike spacing: Typically equal intervals. For example: 100/105/110
- Expiration: 30-60 days. Enough time for the stock to move to the target.
- Net cost: Usually a debit, but smaller than buying a straight call because you are selling two calls.
The position is partially a bull call spread (A-B) and partially a naked short call (C). That naked component is what creates unlimited risk above the highest strike.
When to Use This Strategy
Use a Christmas tree call when:
- You are moderately bullish — you think the stock will rise but not explode higher
- You want to reduce the cost of a bullish trade by selling extra premium
- You have a specific upside target and are comfortable capping above it
- You are willing to accept risk above the highest strike (or plan to manage it)
- Implied volatility is elevated, making the short calls richly priced
This is not a beginner strategy. The naked short call at the top creates unlimited risk. Many traders use this with a plan to close or adjust if the stock approaches the highest strike.
Example Trade
Stock XYZ is trading at $100. You think it will rally to around $105.
- Buy 1 XYZ $100 call for $4.00
- Sell 1 XYZ $105 call for $2.00
- Sell 1 XYZ $110 call for $0.80
- Net debit: $4.00 - $2.00 - $0.80 = $1.20 ($120 total)
If XYZ finishes at $105: The $100 call is worth $5. Both short calls expire worthless. Profit: $5 - $1.20 = $380. This is max profit.
If XYZ finishes at $110: The $100 call is worth $10, the $105 call costs $5, the $110 call is worthless. Net: $10 - $5 - $1.20 = $380. Wait — the $110 call is at the money, so it is still $380. But above $110, the second short call starts biting.
If XYZ rallies to $120: The $100 call is worth $20, the $105 call costs $15, the $110 call costs $10. Net: $20 - $15 - $10 - $1.20 = -$620 loss. And it gets worse the higher the stock goes.
If XYZ drops to $95: All calls expire worthless. You lose the $120 debit.
Risk and Reward
- Max profit: (First spread width - net debit) x 100. ($5 - $1.20) x 100 = $380. Achieved when the stock is between the first and second short strikes at expiration.
- Max loss: Unlimited above the highest strike. Below all strikes, the max loss is just the net debit ($120).
- Breakeven: Lower breakeven is the ATM strike + net debit ($100 + $1.20 = $101.20). Upper breakeven is harder to calculate and depends on the strike spacing.
The asymmetric risk is the key feature. Limited downside loss, good profit in the target zone, but unlimited risk above.
Tips and Common Mistakes
- Have an exit plan for the upside. If the stock blows past the highest strike, close the position. Do not let a winning thesis turn into an unlimited loss.
- This is not a set-and-forget trade. Monitor it closely, especially as the stock approaches the upper strikes.
- Compare to a bull call spread. A simple bull call spread has no upside risk. The Christmas tree is cheaper but riskier.
- Consider buying a far OTM call to cap risk. Adding a fourth leg (buy a call above the highest short strike) turns this into a defined-risk trade.
- Works best in moderate IV environments. Too low and the credits from selling calls are minimal. Too high and the stock might move too much.
Related Strategies
- Bull Call Spread — simpler bullish spread with defined risk
- Call Ratio Spread — similar structure with ratio component
- Call Ladder — closely related multi-strike bullish trade
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