Well as we are approaching the Christmas holiday I thought it would only be appropriate to unleash another one of my favorite trades. This trade is a variation of what is known as a Christmas Tree. They are also sometimes called ladders. They are essentially a ratio spread although a little safer then a typical 1 x 2 ratio spread. First let me define what a typical christmas tree is. With stock XYZ at $50 we would buy one Jan 50 call and sell one Jan 55 call and sell one Jan 60 call. This trade would be put on for a debit vs the credit you would get for a ratio spread by buying one jan 50 call and selling two jan 55 calls. BTW, this is a long christmas tree. A short tree would be a long gamma backspread where you would be short the jan 50 call and long one jan 55 call and long one jan 60 call. Ok, now that we know what it is let me take this a step further. Many of you are familiar with the calendar thread. On that thread I talked about one of my favorite short vol strategies the short time spread. Very safe way to play negative vega. A very risky and aggressive way to play short vega would be to sell straddles or strangles. Well, the long christmas tree is in between. Not as risky as the short straddle/strangle but not as safe as the short time spread. But it is one of my favorites. However, I modify this strategy to get the amount of vega that I want. So I actually put on diagonal spread. With stock XYZ at $50 I would buy the jan 50 straddle and sell the June 55 strangle and the June 60 strangle. So it's not a pure tree but I trade it this way to get the most short vega I can. Essentially I have a quasi-ratio spread on. So now let's examine this spread a little more closely. Why is this spread a short vega spread. Well, because we are short the wings on the back month. We are long the body of the front month to keep this trade delta neutral for the time being. By buying the front month we are buying gamma not vega. What we are hoping for is simply a drop in Vol. Direction is not important although obviously a move to the up side will be preferential because vol tends to drop when stocks rise and rise when stocks fall. Now some of you might ask why not buy and sell the jan's? Well If I buy the jan 50 straddle and sell the 55's and 60's we are not short that much vega. The vega is in the back months not the front month. Why not buy the jun 50 straddle and sell the jun 55's and 60's? Because I don't want to neutralize the vega on the back months. I want to buy gamma on the front month and be short vega on the back month. Next question, why not do a regular ratio spread then. Well the advantage the christmas tree has over a regular ratio spread is less gamma exposure and less risk. By moving the 2nd option out another strike you widen your profit zone and make the trade safer. Since I am selling the back months I have even less gamma risk. So if the stock takes off and runs I will not get hurt that bad. My risk here is being short vega not short gamma so large moves will not hurt me that much as they would if I was doing a front month ratio spread. So like I said earlier this spread is a little juicier then the short time spread but not as risky as just selling straddles outright. This is very good strategy for selling vega and just in time for the Christmas season!!!!!!