Sensitivity of Put-Spread Collar Performance to Rebalancing Schedule

Is put-spread collar strategy performance sensitive to the portfolio rebalancing schedule (due to rebalance timing luck). In their January 2023 paper entitled “The Hidden Cost in Costless Put-Spread Collars: Rebalance Timing Luck”, Steven Braun, Corey Hoffstein, Roni Israelov and David Nze Ndong analyze the performance of the following quarterly put-spread collar strategy: (1) long passive exposure to the S&P 500 Index; (2) a put spread on the index (long a 5% out-of-the-money put and short a 20% out-of-the-money put); and, (3) short an out-of-the-money call option on the index equal in value to the put combination. All option positions commence three months from expiration, and option positions are reset at each expiration (third Friday of expiration month). They consider three expiration schedules: December, March, June, September (DMJS); January, April, July, October (JAJO); and, February, May, August, November (FMAN). As a benchmark neutralizing rebalance timing effects, they further construct an equal-weighted DMJS-JAJO-FMAN portfolio. Using monthly S&P 500 Index returns and returns for the specified index options positions during 2008 through 2022, they find that:

(more…)