Can You Beat the Market? Part 5
More data please.
A University of Massachusetts professor and doctoral student recently conducted a study, sponsored in part by the Options Industry Council (OIC), and published the results in a paper titled "Loosening Your Collar: Alternative Implementations of QQQ Collars."
Using 10 years of data, the study compared the performance of QQQQ, the PowerShares exchange-traded fund, when collared and when un-hedged (owning QQQQ only, with no options).
As with the CBOE S&P 500 CLL 95-100 Collar Index, this study involved the purchase of six-month puts and the consecutive sale of one-month call options. This time, both the puts and calls were 2% out of the money (OTM) when traded.
[Note that if the same nomenclature were used for this collar as for the CBOE collar, it would be called the OIC PowerShares 100, 98-102 Collar Index.]
The study included two different collars: passive (with a set of fixed rules) and active (the rules vary according to changing economic conditions).
The study shows that the collared QQQQ portfolio significantly outperformed a portfolio that simply owned QQQQ from April 1999 through May 2009. And if that's not enough of an eye-opener, risk was reduced by 65% over the 122-month study.
These results are spectacular, especially when compared with the performance of the CLL 95-110 Collar Index. I'll comment on that later, but for now, let's concentrate on the findings.
The six-month put purchase is better than buying either one- or three-month puts.
The active collar is more effective than passive. But, this is not the place to be concerned with the active collar. The original paper can be accessed for that information.
The authors state that the collar was less effective during the steadying years of 2002 to 2007. That's as expected.
Click to enlarge
The graph says it all. The QQQQ got hammered during the bursting of the technology bubble, and that's understandable because QQQQ consists of the 100 largest capitalized, non-financial stocks that trade in the Nasdaq market. That means this ETF was loaded with technology stocks.
But, something bothers me -- and I'm publishing this before discovering the answer. Collars are slightly bullish strategies. If you recall from previous discussions, a collar is equivalent to selling a put spread.
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