Article by: Edward Szado, Thomas Schneeweis
Published by: The Options Industry Council
Date: Sep 2009
“A study by Szado and Schneeweis found that a long protective collar strategy using six month put purchases and consecutive one month call writes earned far superior returns compared to a simple buy-and-hold strategy while reducing risk by almost 65%. The research evaluated more than ten years of data on the PowerShares QQQ exchange-traded fund (Ticker: QQQQ) and its associated options. The authors also extended the analysis to a more active implementation of the strategy. While the passive collar used a constant set of fixed rules, the active collar uses rules that adapt the collar to changing macroeconomic variables and market conditions. The active collar implementation generated higher returns than the passive implementation, while volatility was only slightly higher. Over the 122 month study period, the passive collar returned almost 150%, while the QQQ lost one-third of its value. The active collar outperformed both strategies and returned more than 200%. Finally, the study collared a small cap mutual fund. The return of the active mutual fund collar was four times the return of the fund, while the standard deviation was about one-third lower.”
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