## Ultimate Guide To Christmas Tree With Puts Strategy

A Christmas tree with puts is a three-legged strategy involving six puts. The investor starts with a long put at strike D, skips strike C, sells 3 puts at strike B, and buys 2 puts at strike A. Note that only the strikes differ. All options share the same expiration.

Let’s look at an example of Uber (UBER). The investor is long a put with strike of \$33, sells 3 puts at strike of \$31, and buys 2 puts at strike of \$30. Here’s what the payoff diagram looks like:

Before we look at the payoff of a Christmas tree with puts, let’s understand that this strategy will usually result in a small net debit, i.e., the investor has to pay to enter the strategy. In the Uber example, the net debit is calculated as follows:

Compare this with the net debit of a regular put spread:

By selling additional puts, the investor recoups more premium to offset the cost of the initial put. And by buying additional puts, the investor flatlines the payoff diagram, so they are not exposed to further downside.

### Maximum Loss

The investor is long 3 puts and short 3 puts. The most they can lose is the net debit paid. In the example above, the maximum potential loss is \$0.16 per share.

### Maximum Gain

The initial long put at the highest strike price of \$33 gives the investor substantial gain potential if the stock falls below the strike. However, the investor sold puts at \$31 and therefore reduced some of the profit below \$31.

The most the trade could make is the difference between the highest strike price (\$33) and the strike price of short puts (\$31) minus the net debit to enter the strategy (\$0.16). The maximum gain would be \$1.84 per share.

### Breakeven Price

This strategy has two breakeven points.

1. Highest strike – net debit paid.
2. Lowest strike + ½* net debit paid.

Let’s look at the two breakeven prices:

### Payoff Diagram

Let’s look at the payoff diagram closely. We have 3 legs and 6 puts. Leg 1: Long put at strike of \$33:

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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