Endowment Risk Management and Return Enhancement with Listed Index and ETF Options

This article assesses the effectiveness of put spread collar and buy-write strategies as risk management and return enhancement strategies from a stand-alone perspective and as endowment overlays. We find meaningful benefits to passive six-month put/one-month call put spread collar and one-month call buy-write implementations on the QQQ ETF and NDX index compared to a long underlying position. We examine the effectiveness of implementing the strategies using QQQ ETF options and NDX cash settled index options and find few performance differences between the two alternatives. We construct indexes representing the returns to three hypothetical endowments and apply the passive six-month put/one-month call put spread collar and one-month call buy-write as overlays to the endowment portfolios and find performance enhancements, suggesting that there may be an opportunity for significant performance enhancements if implemented actively, particularly in times of low transaction costs.