Risk and Return of Equity Index Collar Strategies

Posted: 18 Dec 2015 Last revised: 27 Jan 2017

See all articles by Roni Israelov

Roni Israelov


Matthew Klein

AQR Capital Management, LLC

Date Written: December 16, 2015


Equity index collar strategies are often perceived as a way for investors, at little to no cost, to exchange some upside exposure for reduced losses on the downside. That perception may be accurate if one considers only the net dollar cost of the strategy’s initial option trades, but it fails to account for the significant drag the collar may impose on returns. We decompose the equity index collar’s returns to show that it is expected to have lower returns than its underlying index, primarily because it earns less equity risk premium. Additionally, collars that are net long volatility exposure may further reduce expected returns because they pay out volatility risk premium. We then compare the collar to other ways of obtaining equity exposure with reduced downside risk. The analysis shows that not only has the collar strategy historically performed poorly relative to these alternatives, but investors should also expect it to continue to underperform in the future.

Keywords: Collar, Collars, Index Collar, Index Collars, Covered Call, Covered Calls, Call Overwriting, Overwriting, Options, Volatility Risk Premium, Variance Risk Premium, BuyWrite, Buy-Write, PutWrite, Put-Write

JEL Classification: G00, G10, G11, G11, G12, G13

Suggested Citation

Israelov, Roni and Klein, Matthew, Risk and Return of Equity Index Collar Strategies (December 16, 2015). Available at SSRN: https://ssrn.com/abstract=2704518 or http://dx.doi.org/10.2139/ssrn.2704518

Roni Israelov (Contact Author)

Independent ( email )

United States

Matthew Klein

AQR Capital Management, LLC ( email )

Greenwich, CT
United States
203-742-3624 (Phone)

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