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x-man
x-man
Number of messages : 22
Points : 2190
Date of Entry : 2015-07-30
Year : 55

attention Christmas Tree Butterfly with Calls

Thu Jul 30, 2015 9:22 pm
A Christmas Tree Butterfly with Calls strategy can be implemented in situations where the trader believes the pair will be slightly bullish. To implement this strategy, the trader is required to buy an atthe- money (ATM) Call, sell an out-of-the-money (OTM) Call three times the amount spent on the (ATM) Call, and buy an out-of-the-money Call with a higher strike price twice the amount spent on the (ATM) Call.
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When to do it
This strategy works best when the trader thinks that the pair is slightly bullish.

The set-up

  • Buy an ATM Call at strike price A (spot +0)
  • Sell an OTM Call at three times the amount of A at strike price B (spot +)
  • Buy an OTM Call twice the amount of A at strike price C (spot +)
  • At the time of creating this strategy, the pair’s price will be at A.


Maximum potential profit
The maximum potential profit is limited to the difference between B and A minus the premium paid.

Maximum potential loss
The maximum potential loss is limited to the premium paid.

Time impact
In the Christmas Tree Butterfly with Calls strategy, time decay works in favour of the trader in order for all the options to expire worthless except the option with strike price A.

Best/worst case scenario
The best case scenario occurs when the pair’s price reaches B and stops, where maximum profit is earned.
The worst case scenario occurs when the pair’s price increases more than expected or ends up being bearish.

Tips
This strategy can be very profitable for traders that expect low volatility but have a sense of direction.Thus instead of implementing the Iron Butterfly strategy, they implement the Christmas Tree if they expect low volatility with a slightly bullish direction.

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