Naughty and Nice is an activity that is part of the How the Saints Save Christmas DLC. It doesn’t unlock until you finish all of the missions in that DLC, with each instance unlocking after completing the previous one. It is the same as during the first part of the final mission in the DLC, The Santa Clawz, where you need to fly around on a sled and shoot presents/coal to those who have been nice or naughty.

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Fire presents are the houses with a blue marker (left) and coal at those with a red marker (right).

Unlike during The Santa Clawz, the houses are not marked on your map, meaning you have to pay attention to the screen when flying around. Houses with blue markers get presents, while red ones get coal. Also, it only takes one present (four during the DLC mission) to clear a blue house and presents still take time to regenerate.