A relatively new options strategy allows asset managers to better protect portfolios and boost returns in very different market conditions, according to a study by academics at the University of Massachusetts Center for International Securities and Derivatives Markets, Amherst.
The study, Collaring the Cube: Protection Options for a QQQ ETF Portfolio, examines a passive collar strategy involving contracts with different maturity and founds it provides greater investor protection and return. Authored by University of Massachusetts finance professors Edward Szado and Hossein Kazemi, the paper was unveiled at the Options Industrys May 1-4 annual conference in Las Vegas. The non-profit Options Industry Council, Chicago, is sponsoring the distribution of the study, which is targeted at asset managers. (A copy of the study is available here.)
Market protection is the focus of a myriad of trading strategies, OIC Managing Director Phil Gocke said in an interview. From a return perspective, the ideal situation for this particular collar strategy is for the underlying ETF to gradually increase toward the strike price over the life of the call.In an options collar strategy, the investor buys a put option against a stock to protect against a loss in value, and writes an offsetting call option to limit the exposure of that position. The strategy is passive, meaning the asset manager does not need to change hedging positions amid the markets ups and downs.
In standard collar strategies, investors buy a put and sell a call of the same duration. The new strategy, which is already used by some sophisticated options players, involves buying six-month puts and selling consecutive one-month calls on the same contract for six months. The benefit in the different length of put and call contracts is to address the time decay or theta problem options contracts lose value as they get closer to their expiration date. By using one-month calls against six-month puts, the investor better preserves the offset between the two contracts.