The Collar Strategy
Collar is a proven strategy that can transfer the downside risk of investing in
stocks. Szado and Kazemi of the University of Massachussetts performed a study
of QQQ.
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Over the 9-year period from March 1999 to March 2008, the collar strategy returned more than
150% cumulatively, while QQQ lost 12% during this period. Annualized return was
23.01% with standard deviation of only 9%. While the standard deviation of QQQ
was 27%! |
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The Active Collar
Szado extended the study to March 2009 and found an active collar can boost the
return. When QQQ went up, the strike prices of the collar must be raised. When
it dropped, the strikes must be lowered.
Algorithmic Trading with a Collar
We discovered a way of boosting the performance of a collar strategy by actively
buying and selling the underlying rather than adjusting the strike prices of the
collar as suggested by Szado.
We got this idea from a buy-low, sell-high model by Levkovich.
The Results
We compared the performances of the Buy-and-Hold, the Collar, and our
Algorithmic Collar from October 2004 to November 2007 on FXI (the ETF that
tracks China equities). Our algorithmic collar outperformed both the
buy-and-hold and the collar strategies.
Back-Testing Levkovich's Model
We decided to quantify Levkovich's model and test it in Tradestation on 44 most actively traded US
stocks on a much higher frequency.