How does a Christmas tree spread work with skipped strikes?

Question

AcadiFi · Accepted Answer

A Christmas tree spread uses six options across three or four strikes with asymmetric quantities, creating a payoff resembling its namesake.

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Max profit occurs at $110 where the 100 call is worth $10 and the shorts and long 115s are worthless: profit = $10 - $1.60 = $8.40. Above 115 the two long 115 calls cap losses. Unlike standard butterflies (1-2-1), the 1-0-3-2 structure shifts the peak profit to the skipped zone and provides broader profit range with slightly different Greek exposure. Christmas trees suit traders expecting a specific target price with tight time horizon. They combine features of butterflies and ratio spreads—higher max payoff than a butterfly but requiring more precise price forecasting and more capital tied up in the long wing.

How does a Christmas tree spread work with skipped strikes?

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