Did You Know? QQQ Lost Half Its Value in 2008-09

In the throes of the credit crisis, the PowerShares QQQ ETF (QQQ) took a nosedive, plummeting by nearly half from peak to trough between 2008 and 2009. Even diversification, that age-old guard against portfolio-wide losses, seemed helpless in the face of such market upheaval.

Enter: Collar Strategies

With traditional defense strategies faltering, investors are turning to collar strategies for protection. A collar involves buying puts (downside protection) and selling calls (financing this protection), creating a range within which your portfolio's value is buffered from market fluctuations.

Study Finds Collars Outperform Buy-and-Hold

A study by Edward Szado and Thomas Schneeweis at the University of Massachusetts found that a long protective collar strategy using six-month put purchases and consecutive one-month call writes outperformed a simple buy-and-hold strategy. Over ten years, the passive collar returned nearly 150%, while QQQ lost one-third of its value.

Active Collars: Even Better Performance

The researchers also evaluated an active collar implementation that adapted to changing market conditions. This version generated higher returns—over 200%—with only slightly more volatility than the passive strategy.

Putting It into Practice

So, how can you apply this to your portfolio? Here are a few scenarios:

- Protecting QQQ: If you hold QQQ in your portfolio, consider implementing a collar strategy using QQQ options. This could help mitigate losses during market downturns. - Hedging Calls: If you're long calls on stocks like MS or DIA, selling puts (and buying them back if triggered) can finance these positions while providing downside protection. - Generating Income: For income-focused portfolios, consider using ETFs like TIP or C to create a collar that generates steady premium income.

Final Thoughts

While collar strategies show promise in protecting portfolios, they're not without risks. Options are complex instruments with limited lifespans and variable prices. Always conduct thorough due diligence before implementing any options strategy.