Christmas Eve on Sesame Street

The special starts with live-action versions of the Muppets enjoying an ice skating party. Afterward, they head home to Sesame Street performing the song "True Blue Miracle".

In the main story, Oscar the Grouch plants the seeds of doubt in Big Bird's mind whether Santa Claus can actually get down chimneys to deliver Christmas presents. Big Bird enlists the help of Kermit the Frog and Grover to interview children about how he manages it; their responses vary. Big Bird even attempts a reenactment with Snuffy but it is unsuccessful. He spends the night out in the cold on the brownstone's roof, waiting for Santa to appear in person. After the residents of Sesame Street realize that Big Bird has gone missing, Maria confronts Oscar for upsetting Big Bird. Oscar reveals that he was only teasing Big Bird and agrees to help search for him.

Meanwhile, in a variation on the 1905 O. Henry story "The Gift of the Magi", Bert and Ernie want to give each other Christmas presents, but they have no money. Bert trades away his prized paper clip collection to buy a pink soap dish for Ernie's Rubber Duckie, but Ernie has bartered it to get Bert an empty cigar box for his paper clip collection. Mr. Hooper, the store owner, realizes what is happening and gives them their treasured possessions back as Christmas presents.