Re: call tree? - TreMis?

Question

On a Euro Currency call tree with the market trading @ 1.4700 would a 1.48 - 1.49 -1.50 call tree be buying the 1.48 call and selling both the 1.49 call and 1.50 call? Would it be the same number of contracts on each leg?

Answer 1

<<<On a Euro Currency call tree with the market trading @ 1.4700 would a 1.48 - 1.49 -1.50 call tree be buying the 1.48 call and selling both the 1.49 call and 1.50 call?>>>

Yes.

<<<Would it be the same number of contracts on each leg?>>>

Yes

Here is a little information from Sheldon Natenberg's book Option Volatility & Pricing"

"A Christmas tree (also refered to as a ladder) is a term which can be applied to a variety of spreads. The spread consists to three different exercise prices where all options are of the same type and expire at the same time. In a long (short) call Christmas tree, one call is purchased (sold) at the lowest exercise price, and one call is sold (purchased) at each of the higher exercise prices.

...

Long Christmas trees, when done delta neutral, can be thought of as particular types of vertical ratio spreads. Such spreads therefore increase in value if the underlying market either sits still or moves very slowly."

Answer 2

I am not sure about the Euro currency. ( Im in the US so I am not 100% sure when it comes to Euros)

The call tree strategy is used when an investor believes the stock is going to make a move higher. It is a variation of the ratio spread, so a significant upward move in the stock price will result in a very large loss due to the extra short call. The staggered strike prices for the written calls in the tree strategy reduce the amount of loss incurred when the share price rises more than expected (unlike the ratio spread, where the call options have the same strike).

Does that help? I'm kinda confusing myself!