Most traders think about volatility as something that happens to them — a problem to manage, a source of risk to minimize. Kyle Schultz thinks about it differently. For Kyle, volatility is a regime signal, a position-sizing input, a strategy filter, and in some cases a direct trading instrument. Getting your volatility exposure right is how you build a portfolio that survives crisis events instead of blowing up in them.
Kyle is the founder of Algorithmic Futures and runs a registered CTA called Rovinia Investment Management. He came up through Chicago’s prop trading scene, spent time doing hedge fund manager research at a major insurance company, went through UCLA’s MBA program, and then spent years building systematic strategies across equity index futures, treasury futures, and currency futures. His focus now is on intraday and short-term mean reversion and momentum strategies, combined into diversified portfolios designed to perform across multiple market environments.
This episode covered how Kyle categorizes volatility events, how he applies volatility regimes as filters in strategy development, how he sizes positions using VIX levels, and what the volmageddon event of 2018 taught the trading world about short-volatility exposure.
Watch the full episode below, then read on for the complete breakdown.
Long vol versus short vol: the most important portfolio question
Before any discussion of specific strategies, Kyle’s starting framework is to categorize every strategy in a portfolio as either long volatility or short volatility. This is the foundational question in portfolio construction, and most retail systematic traders have never explicitly asked it.
Short-vol strategies collect premium during calm markets and get punished during spikes. Option selling, calendar spreads on VIX futures, many mean reversion approaches — these are short-vol by nature. They perform well 80% of the time when markets are grinding higher. They get crushed in 2008, March 2020, or any event that spikes volatility sharply.
Long-vol strategies lose small amounts regularly during calm periods but generate outsized returns when volatility spikes. Trend-following approaches in equity futures, breakout strategies, certain momentum systems — when markets move fast and decisively, these strategies pick up gains that more than offset the periods of flat or negative performance.
Kyle’s portfolio construction goal is deliberate balance: enough long-vol exposure to survive and profit from crisis events, enough short-vol exposure to generate returns in the quiet stretches that make up most of any calendar year. Without that balance, your portfolio is essentially a bet on one market regime persisting indefinitely.
Categorizing volatility events and why it matters
Not all volatility events are the same, and Kyle was specific about distinguishing between them. Three distinct types require different strategies to exploit or survive:
| Volatility event type | Examples | Duration |
|---|---|---|
| Extended bear markets | 2008 financial crisis, 2001–2002 tech bust | 12–24 months |
| Violent one-day drops | 1987 Black Monday, flash crash | Hours to days |
| Moderate corrections | 10–15% pullbacks, typical in any cycle | Weeks to months |
A long-vol strategy that works well during extended bear markets may not capture a one-day flash crash. A mean-reversion approach that thrives on moderate 10% corrections might fail in a sustained year-long downtrend. Understanding how each of your strategies performs across each category is a separate exercise from just looking at total backtest returns.
The volmageddon lesson: what concentrated short-vol exposure actually costs
On February 5, 2018, the VIX spiked from 18 to 37 in a single day — over a 100% increase. For context, the VIX had spent most of 2017 below 15. Years of QE-suppressed volatility had encouraged a massive buildup of short-vol positions in products like XIV and SVXY, the inverse VIX ETFs that had returned over 500% in the preceding five years.
When VIX spiked 100%, those ETFs were essentially wiped out. Several large CTAs that were selling volatility as their primary strategy, including LJM Partners (a billion-dollar fund), went to zero. The traders who lost capital in that event weren’t naive. They had years of research and track record behind their approach. The problem was that the event they hadn’t accounted for — a sudden, massive spike in implied volatility after an extended low-vol period — wasn’t adequately in their backtested data.
Kyle’s lesson from this: know your short-vol exposure with precision. A backtest that doesn’t include a genuine VIX doubling in one session is incomplete. If your worst-case scenario analysis doesn’t include volmageddon-type events, you’re underestimating your actual risk.
How to apply volatility filters in strategy development
Kyle’s approach to incorporating volatility into strategy development typically happens at the end of the build process, not the beginning. The sequence:
- Build and backtest the strategy on its own merits
- Analyze performance segmented by volatility regimes — how does the strategy perform when VIX is below 20, between 20 and 40, and above 40?
- If performance is meaningfully different across regimes, add a volatility filter that adjusts position sizing or pauses the strategy in unfavorable regimes
- Out-of-sample test the filtered version to confirm the improvement isn’t a backfit
The risk of applying volatility filters is overfitting. If you curve-fit stops, targets, and volatility thresholds all at once, you’ll produce a beautiful backtest and a live trading disaster. Kyle’s preference is to use volatility filters to reduce exposure in regimes where you have clear logical reasons to expect underperformance — not to squeeze every last basis point out of historical data.
VIX-based position sizing: a practical framework
Kyle described a concrete position-sizing approach based on VIX regime:
- VIX below 20 — Low-vol environment, markets tend to grind steadily. Mean-reversion strategies often perform well here. Increase allocation to short-vol strategies, keep momentum strategies at standard size.
- VIX between 20 and 40 — Transitional or choppy environment. Markets may be whipsawing. Consider reducing exposure across most strategies, prioritize strategies that benefit from choppiness.
- VIX above 40 — High-vol, likely crisis or near-crisis conditions. Intraday momentum strategies can perform well here — markets move decisively and trend-following approaches pick up strong signals. Increase allocation to long-vol strategies.
The thresholds aren’t magic numbers. Kyle uses them as a starting framework, then refines based on what his specific strategy backtests show at each level. The key principle: position size should not be static across radically different market environments.
VIX versus ATR: implied versus realized volatility
A common question is whether to use VIX (implied volatility from options pricing) or ATR (average true range, a measure of historical realized volatility) as a filter. Kyle’s view:
VIX is forward-looking. It reflects what options market makers expect volatility to be in the coming period. When a VIX spike is incoming — before an election, around an earnings season, ahead of a major economic report — the VIX term structure starts reflecting that expectation before the event actually occurs. This makes it a leading indicator of sorts.
ATR is backward-looking. It tells you how volatile the market has been, not how volatile it’s expected to be. It can be useful for adjusting stop sizes and profit targets based on current market behavior, but it won’t warn you about a vol spike before it happens.
For filtering strategies by regime, Kyle prefers VIX. For dynamically sizing stops and targets within a trading session, ATR can complement it. Using VIX futures (second, third month) rather than the spot VIX index also reduces some of the noise the spot index can introduce, since the futures term structure moves less dramatically than spot VIX on any given day.
The best long-vol strategies might not be what you expect
One of Kyle’s more interesting findings: the best long-volatility strategies he’s found aren’t built by trading VIX futures directly. They’re intraday momentum and breakout strategies in equity index futures. The reason connects to how markets move during crises: fast, in one direction, with strong follow-through. Intraday momentum strategies are structurally designed to capture exactly that kind of movement.
In 2008, a well-designed intraday momentum strategy on equity index futures would have been generating strong returns on the short side as markets fell consistently. During the COVID crash of March 2020, the same category of strategies had some of their best recorded months. This is the “elevator down” effect — markets are slow going up (escalator) and fast going down — and intraday momentum strategies are positioned to capture fast directional moves regardless of direction.
The practical implication: if you want long-vol exposure in your portfolio, you may not need to trade VIX products at all. Look at whether your momentum strategies are genuinely long-vol in character and size them accordingly.
Related episodes
- Episode 10: Perry Kaufman on market noise, price shocks, volatility and Information Ratio
- Episode 121: Volatility and systematic options strategies with Luca Giusti
- Episode 140: Forecasting a volatility tsunami with Andrew Thrasher
- Episode 131: Which strategies work in low-volatility environments
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