Most traders know three options strategies. Buy a call. Buy a put. Maybe sell a covered call if they’re feeling adventurous. And then they wonder why their results are inconsistent.
Here’s the truth: the market gives you dozens of tools. The traders who win long-term are the ones who know which tool to pick up and when. Today I want to talk about one of the most underutilized, misunderstood, and frankly underappreciated structures in all of options trading.
The Christmas Tree Spread.
What It Is
A Christmas Tree — sometimes called a Skip Strike Butterfly — is a modified butterfly spread. Here’s the basic structure for a bullish Christmas Tree using calls:
You buy one call at a lower strike. You skip a strike. Then you sell three calls spread across two higher strikes — typically two at one strike and one at another. The result is an asymmetric structure that looks, when drawn out on a risk graph, a little like the shape of a Christmas tree. Hence the name.
Unlike a standard butterfly which is perfectly symmetrical, the Christmas Tree is deliberately lopsided. And that asymmetry is exactly the point.
Why the Asymmetry Matters
A standard butterfly has one sweet spot — price has to land right on your short strike at expiration for maximum profit. That’s a precise target. Sometimes too precise.
The Christmas Tree gives you a wider profit zone on one side while still keeping your risk defined. You’re not just targeting a single price point. You’re building a structure that can profit across a range of outcomes — while still capping what you can lose.
That’s the balance every serious trader is always chasing. Range of profit. Defined risk. Reasonable cost to enter.
The Christmas Tree delivers all three when it’s set up correctly.
When to Use It
This is where most traders go wrong — not with the structure itself, but with the timing. A Christmas Tree isn’t a strategy you throw on because the chart looks interesting. It’s a strategy you deploy when specific conditions line up.
Here’s what I look for:
A directional bias with conviction. The Christmas Tree is not a neutral strategy. You’re leaning bullish or bearish. If you don’t have a clear read on direction, this is not your trade.
Elevated implied volatility. When IV is high, options are expensive. The Christmas Tree, because it involves more selling than buying, benefits from elevated premium. You’re getting paid more for the options you sell, which improves your cost basis on the whole structure.
A defined price target. The best Christmas Tree setups happen when you have a technical level — a support zone, a prior high, a key moving average — that gives you a logical place to anchor your strikes. You’re not guessing. You’re building the trade around a level the market has already told you matters.
Risk Management First — Always
I don’t care how elegant the setup looks. I don’t care how confident you are in the direction. Before you put on any Christmas Tree, you need to know three numbers cold: your maximum profit, your maximum loss, and your breakeven points.
The Christmas Tree has two breakeven levels — one on each side of the profit zone. Know them. If price threatens either one, have your plan ready before it happens — not in the moment when your emotions are running hot.
This is the discipline that separates the traders who last from the ones who blow up chasing a pretty risk graph.
The Bigger Picture
Every strategy I teach comes back to the same foundation: probability, defined risk, and understanding what the market is pricing in. The Christmas Tree is a perfect expression of that philosophy. It rewards traders who do the work — who understand volatility, who pick levels with conviction, who manage risk before they think about reward.
It’s not the flashiest strategy. It won’t make you rich overnight. But deployed correctly, in the right environment, with strikes anchored to real technical levels — it is one of the most elegant, efficient structures options trading has to offer.
And elegant beats flashy every single time.
Don Kaufman,
Chief Strategist, TheoTrade
