Christmas Tree Put

What is a Christmas Tree Put?

A Christmas tree put is the bearish version of the Christmas tree call. You buy one at-the-money put, sell one OTM put at a lower strike, and sell another put at an even lower strike. You want the stock to drop to the first short strike for max profit, but not crash through the lowest strike.

Like its call counterpart, the name refers to the tree-shaped payoff diagram. The trade is bearish but measured — you profit from a moderate decline, not a collapse. If the stock drops too far below the lowest strike, the extra short put turns the profit into a loss.

How to Set It Up

• Buy 1 ATM put at strike A (near the current price)
• Sell 1 OTM put at strike B (lower)
• Sell 1 further OTM put at strike C (even lower)
• All same expiration
• Strike spacing: Typically equal intervals. For example: 100/95/90
• Expiration: 30-60 days.
• Net cost: Usually a debit, reduced by the two short puts.

The position combines a bear put spread (A-B) with a naked short put (C). The naked short put is where the risk comes from if the stock drops below the lowest strike.

When to Use This Strategy

Use a Christmas tree put when:

• You are moderately bearish — you expect a pullback but not a crash
• You want to reduce the cost of a bearish trade by selling extra premium
• You have a downside target and are comfortable with risk below it
• Implied volatility is elevated, making those short puts worth more
• You have a management plan if the stock drops below the lowest strike

This is an intermediate-to-advanced strategy. The risk below the lowest strike is significant (the stock can drop to zero), so you need to monitor it actively.

Example Trade

Stock XYZ is trading at $100. You think it will pull back to around $95.

• Buy 1 XYZ $100 put for $4.00
• Sell 1 XYZ $95 put for $2.00
• Sell 1 XYZ $90 put for $0.80
• Net debit: $4.00 - $2.00 - $0.80 = $1.20 ($120 total)

If XYZ drops to $95: The $100 put is worth $5. Both short puts expire worthless. Profit: $5 - $1.20 = $380.

If XYZ drops to $90: The $100 put is worth $10, the $95 put costs $5, the $90 put is at the money. Net: $10 - $5 - $1.20 = $380. Still near max profit.

If XYZ crashes to $80: The $100 put is worth $20, the $95 put costs $15, the $90 put costs $10. Net: $20 - $15 - $10 - $1.20 = -$620 loss. The deeper it drops, the worse it gets.

If XYZ rallies to $105: All puts 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: Significant below the lowest strike. Theoretically, if the stock went to zero, the loss could be (lowest strike - max profit zone value) minus credit adjustments. On the upside, max loss is just the net debit ($120).
• Breakeven: Upper breakeven is the ATM strike - net debit ($100 - $1.20 = $98.80). Lower breakeven depends on strike spacing.

The risk profile is asymmetric: small loss if you are wrong on direction, good profit in the target zone, but growing losses if the stock drops too far.

Tips and Common Mistakes

• Have a plan for a crash. If the stock drops below the lowest strike, close or adjust immediately. The naked short put at the bottom can generate large losses.
• Do not hold to expiration blindly. This trade requires active management.
• Consider adding a long put below to cap risk. Buying a put below the lowest short strike turns this into a defined-risk condor.
• Works well on stocks with strong support. If there is a clear support level, set your lowest strike just above it.
• Compare to a bear put spread. The spread is simpler and safer. The Christmas tree is cheaper but riskier.

Related Strategies

• Bear Put Spread — simpler bearish spread with defined risk
• Put Ratio Spread — similar structure with ratio component
• Put Ladder — closely related multi-strike bearish trade