The Hidden Cost in Costless Put-Spread Collars: Rebalance Timing Luck

https://www.pm-research.com/content/iijaltinv

Posted: 25 Jan 2023 Last revised: 1 Apr 2024

See all articles by Steven Braun

Steven Braun

Newfound Research

Corey Hoffstein

Newfound Research

Roni Israelov

Independent

David Nze Ndong

affiliation not provided to SSRN

Date Written: January 24, 2023

Abstract

Prior research and empirical investment results demonstrate that strategy performance can be highly sensitive to rebalance schedules, an effect called rebalance timing luck (“RTL”). In this paper we extend the empirical analysis to option-based strategies. As a case study, we replicate a popular strategy – the self-financing, three-month put-spread collar – with three implementations that vary only in their rebalance schedule. We find that the annualized tracking error between any two implementations is in excess of 400 basis points. We also decompose the empirically-derived rebalance timing luck for this strategy into its linear and non-linear components. Finally, we provide intuition for the driving causes of rebalance timing luck in option-based strategies.

Keywords: Calendar-Based Rebalancing, Options, Portfolio Construction, Put-Spread Collars, Rebalance Timing Luck, Systematic Investing

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

Suggested Citation

Braun, Steven and Hoffstein, Corey and Israelov, Roni and Nze Ndong, David, The Hidden Cost in Costless Put-Spread Collars: Rebalance Timing Luck (January 24, 2023). https://www.pm-research.com/content/iijaltinv, Available at SSRN: https://ssrn.com/abstract=4336419 or http://dx.doi.org/10.2139/ssrn.4336419

Steven Braun (Contact Author)

Newfound Research ( email )

380 Washington St.
2nd Floor
Wellesley, MA 02481
United States

HOME PAGE: http://www.thinknewfound.com

Corey Hoffstein

Newfound Research ( email )

380 Washington Street
2nd Floor
Wellesley, MA 02481
United States

HOME PAGE: http://www.thinknewfound.com

Roni Israelov

Independent ( email )

United States

David Nze Ndong

affiliation not provided to SSRN

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