Study finds QQQQ collars give better returns
LAS VEGAS, May 1 (Reuters) - Institutional investors can get better returns and less volatility on a fund tracking the Nasdaq 100 index .NDX by using an options strategy called a collar rather than just owning the exchange traded fund (ETF), according to a study.
The study, conducted by the University of Massachusetts business school with the support of the Options Industry Council, covered nine years of data through March, and was released on Thursday at the annual option industry meeting in Las Vegas.
Options on the PowerShares QQQ fund (QQQQ.O), formerly known as the Nasdaq-100 Index Tracking Stock and popularly called the Cubes, are crowd favorites in the U.S. options market.
It is one of the busiest option names in volume and often used by investors as a way to bet on volatility in the technology sector.
A collar is a spread strategy that involves selling a call on an existing long stock position and buying a protective put at the same time.
An equity call allows investors to buy a security at a given price and time, while a put conveys the right to sell the underlying stock.
The protective strategy works well if an investor is concerned that the underlying stock or ETF may trend lower in the short term but believes the shares in the fund will rise in the long run.
The study found that the collar strategy using the purchase of a 6-month put combined with consecutive 1-month call sales provided far better returns compared with buying or holding the Cubes.
Over a 9-year period, the strategy returned more than 150 percent, cumulatively, while the cube portfolio lost more than 12 percent, the study said.
The study also revealed the strategy reduced the risk of holding the ETF. The volatility on the Cubes was 40.99 percent, while the collar strategy cut volatility by 75 percent to below 10 percent.
"This is a pretty powerful strategy," OIC Managing Director Philip Gocke told Reuters. "This shows that hedging a portfolio is not just a cost on an investor's returns but in fact, increases a portfolio's performance."
The OIC is funded by the U.S. options exchanges and the Options Clearing Corp. (Reporting by Doris Frankel, Editing by Ian Geoghegan)
