How Do Put Spread Collar Strategies Compare to the DRS?
Swan Global Investments manages many different types of hedged equity and options-based strategies. For example, Swan has partnered with Pacer ETFs to provide investors with a family of buffered outcome ETFs, as well as, offer a suite of SOS Shield strategies for separately managed accounts, all of which utilize put spread collars. Swan has been managing its proprietary hedged equity strategy called the Defined Risk Strategy since its inception in 1997.
The key thing to keep in mind is the put spread collar trade here represents a trade, not an overall strategy. It is true that some products out there have products that do nothing but put-spread collars and have found some success doing just the one thing.
The Defined Risk Strategy, on the other hand, is an overall strategy designed for full market cycles. It has three separate but complementary components that are meant to see it through bull and bear markets. In addition, the Defined Risk Strategy is actively managed and seeks to profit from dislocations in the market by actively managing the hedge.
The DRS profit/loss profile looks somewhat different than put spread collar. Specifically, the 2-year LEAPS hedge holds value throughout the entire hold period (e.g. 1 year). As a result, the profit/loss profile does not have sharp breakpoints at option strike prices.
Further, since shorter-term options (calls and puts) are actively managed, profit and loss are not delivered in a structured manner and so is better depicted as a band of possible performance above and below the hedge + equity profit and loss curve shown below.
Source: Swan Global Investments NOTE – this chart is for illustration purposes, not a guarantee of future performance. The charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. The effectiveness of the hedge and degree of downside risk mitigation varies with market conditions. The DRS can and does have periods of losses.