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Trading Collars On The QQQQ

Collars On The QQQQ
My conversation with the OIC's Phil Gocke (tune in to Options Insider Radio Episode 17 for more information) prompted quite a few questions about the collar study we discussed. Many listeners wanted to know more about the study along with where they can review the results for themselves.

The study compared the performance of the Powershares QQQ ETF  vs. a strategy that incorporated a protective collar on the QQQQ. The study included nine years worth of data from March 1999 through March 2008.


Basic Strategy, Big Results
The underlying innovation of the study was relatively basic, but the results of the study were nothing short of revolutionary. Instead of a typical zero-cost collar, the study took a different approach to the collar position.

The authors opted to write standard one-month ATM options for the covered call portion of the collar. However, instead of hedging the position with short-term puts, they used six-month puts in their collar positions.

This simple change had a dramatic impact on the results. Instead of incurring significant amounts of time decay every month, the six-month puts allowed the authors to mitigate their overall theta. As a result, the strategy generated rates of return that were markedly better than expected.

A few key findings of the study:

• The collar portfolio returned 150% over the 108 month time period while the naked QQQQ portfolio lost 12%.
  

• The collar portfolio incurred significantly less risk than the naked QQQQ portfolio. Overall QQQQ volatility was 41% while the volatility of the collar portfolio was below 10%
  

• The collar utilizing six-month puts outperformed similar collars using one-month and three-month puts.
  

• Although the QQQQ incurred a significant downturn during this period, income from the covered calls surpassed the gains generated by the protective puts.
  

Readers looking for more details on the study can view the summary HERE.

Readers looking to analyze the full results can download a PDF of the entire study HERE.