January 4th, 2018, 6:31 pm
In the end, there's no magic associated with any passive option hedging strategy. Over time, the expected return vs. some (downside) risk measure (before transaction costs) is going to be roughly comparable to some other passive way of achieving the same risk reduction, such as a (rebalanced) stock/bond allocation.
Given the extra costs, one issue is why bother?
To make a more detailed comparison, the ideal solution would be to find the historical performance of a very low cost manager that has pursued the strategy in question over a *long* time period -- starting before the '87 crash, as that is relevant. For the collar strategy, I don't think you're going to find such a record.
The next best solutions are passive indices (such as those maintained by the CBOE), theoretical calculations based upon models, and other simulations based upon history. I would guess the minimal theoretical model even having a hope of matching history might be the Bates model, calibrating both a P-version and a Q-version. If you could more or less match the performance of the CBOE indices, then you might be able to use the model to answer some questions going forward for scenarios not seen in the history. But, as I understand the problem, tibbar wants to explore questions such as quarterly vs one-year rebalancing/rehedging. To do that with a model will mean the model will have to be good enough to match conditional market smiles up to one year in maturity. This may require a *much* better model.
But, to belabor the point, in the end one is going to get a reduced return roughly in line with the reduced risk.