VIX Guard Core is a panic hedge on VIXY – it’s designed to make money when your long portfolio is in real pain. You will find its full conditions, description, and code below. It is designed to respond immediately to sudden spikes in volatility. In the Long strategy portfolio, it serves as an insurance policy that incurs a fee during calm periods but can significantly limit capital drawdowns during market crashes.

Inspirations

Hedge strategies don't look impressive daily; some of them may even be inherently loss-making. In theory, they "interfere," often have a low win percentage, regularly generate small losses, and usually worsen portfolio results during calm months.

But their role is entirely different. They are insurance—similar to a policy. Every year you pay a premium and get nothing out of it... until the moment it becomes very necessary. Then this "inconvenient" policy allows for expensive treatment or saves your assets.

VIX Guard Core is a fast intraday strategy with a single task: to capture volatility spikes on VIXY (an ETF based on VIX Futures), which always occur during sudden drops in the stock market, precisely when most Long positions in your portfolio are losing value.

The strategy focuses on an ETF that tracks short-term futures contracts on the VIX volatility index. In practice, this means that when market fear increases and sharp declines occur, volatility contracts become more expensive, driving VIXY higher. The fund purchases futures contracts and rolls them over daily, effectively "shifting" them to subsequent terms. This characteristic results in the instrument losing value over the long term, making it unsuitable for long-term holding. However, it is effective at capturing sudden volatility spikes, which can be pretty high.

Here are some examples of volatility explosions from recent years, along with the moments when they occur.

On the VIXY vs. S&P 500 index chart represented by SPY (green line):

Period 2018-2020

Period 2022

Period 2023

Period 2024-2025

VIX Guard Core is a hedge against the first strike; i.e., every day it stands ready with a BUY STOP set above VIXY's opening price. If the market explodes, the strategy enters a position. If not, it closes the day without a position.

Key Components

• Maximally simple construction.

• Every day, a BUY STOP order is set above the opening price (range adjustments depend on individual preferences; an overview of options is attached below).

• Actually, I am not looking for any filters to improve the result or equity. This hedge is meant to be guaranteed, and filters might exclude the moment in the future when Long positions most need support.

• The goal of this strategy is to ALWAYS be in the market when it is dynamically falling and to cushion the declines of LONG positions.

Entry Rules

Open[0] > 0 is always true, so the strategy will always have a pending order. This seemingly pointless condition, however, allows the Open price to be logged in Algocloud. This is important for monitoring of the strategy's operation and the prices used by Algocloud.

A Buy Stop order, depending on the goal, can be set at a distance of 0.5-1.5 * ATR. Below, I'd like to explain the range of available options.

Exit Rules

• Closing the position always occurs at the end of the day (EOD), without maintaining exposure for longer than one session.

Backtest 1 – Fixed $ Money Management

Backtests pertain to a sample strategy with a 1.2*ATR(5) setting. The backtest was conducted with a fixed capital of $10k.

The strategy profile and the periods in which it earns money in relation to SPY are as follows:

Approximately - years 2011-2025

In details - years 2011-2018

In details - years 2019-2025

The SPY chart shown with a yellow line on the graphs does not represent a nominal comparison of the strategy's performance versus the benchmark, but is intended to illustrate the zoomed strategy's behavior relative to SPY, i.e., in which periods it gains and in which it loses.

As can be seen, the strategy operates oppositely to the index during most corrections, which is its primary goal. However, it also experienced significant drawdowns during periods of steady growth, which is expected behavior, as classic Long strategies typically perform well during these periods, effectively paying for this insurance.

Alternative Strategy Settings

The strategy is extremely simple, and that is its strength.

It has only two parameters:

• ATR Multiplier

• ATR Period

Below, I show the results across the full range of settings for these two parameters.

Net profit is a key measure of efficiency for me due to the hedge strategy goal. As you can see, the proposed settings are stable, but there are many better options available in this category.

Ret/DD - Initially, a more psychologically oriented goal may be beneficial. The stable area suggested in the default settings could provide a more comfortable introduction to the hedge's operation, as it trades less frequently than the faster-entry versions.

In summary, we have a relatively even distribution of Net profit results in the range of 0.4-1.2 (multiplier), practically across the full spectrum of the tested ATR period. I highlighted an example of a stable area, but many other options for selection are viable. By experimenting with these parameters, you will achieve different results in terms of market entry timing and frequency. They can be adjusted more precisely to better align with your goals.

Money Management and Backtest Settings

VIX and consequently VIXY are very specific instruments. Due to daily contract rolling, the instrument will always lose value in the long term, constantly increasing its historical price.

This requires understanding and appropriate backtest settings.

If we wanted to test purchasing VIXY according to an example strategy, e.g., worth $10k, it wouldn't be possible for many of the initial years of the backtest due to the extremely high value of a single VIXY unit in historical data.

A simple solution to this problem is to use fractional shares in the backtest. I've included the proposed settings below.

The size of the hedge position relative to the portfolio is a key aspect in using hedge strategies. These types of strategies are like spices. Used in small amounts, they can yield very good results, but if they take up too large a share of the portfolio, they can definitely harm us.

What "well" means depends on the individual situation. Suppose you have Trend Following and Mean Reversion strategies using capital on average 60% of the time. In that case, you must assume that during a larger correction, all your MR strategies will "take a position," and the allocation will reach 100% or more (you can check this precisely at the portfolio level with our Exposure Master tool).

At the same time, during strong declines, stocks become highly correlated, and you should assume that almost all will lose value, which is precisely the moment when a hedge is useful.

You can therefore calibrate the hedge to your exposure, risk tolerance, etc.

Questions worth asking yourself:

• How much do you want to cushion the decline? What is your tolerance for the drawdown of the entire portfolio? Are you willing to pay more for your comfort? It's important to note that while it's easy to assess drawdown from backtest data, it's much more challenging when dealing with actual capital losses. A good practice is to mentally double the maximum historical open drawdown and express it in dollars. Then, ask yourself if you can mentally accept such a level of drawdown. If not, consider reducing your position, with the option to increase it later as you gain real experience.

• Is this strategy your only hedge? It might be worth having several different hedge strategies for different types of declining markets.

• Do you also have Short strategies? What type? Will they be in the market when you need them the most? By nature, they are inversely correlated with Long positions. If they are MR strategies, their problem is that they often take TP and exit the market exactly when the market continues to fall intensely (this is where hedge strategies should work).

• Do you have other strategies uncorrelated with the stock market during declines? What is their share in your portfolio? How helpful can they be during periods of stock decline?

• Do you want to manage the hedge's allocation dynamically, or are you looking for a completely hands-off solution?

There is no simple answer. It's definitely worth combining strategies in a portfolio (this can be easily done at the SQX level) and checking how much a given hedge improves your results and equity by experimenting with the settings.

I suggest starting with a minimal share of hedge strategies in the portfolio, e.g., 2-5%, gradually increasing this share or even periodically managing it.

In my portfolio, the allocation to such strategies never exceeds 15% and usually hovers between 5% and 10%.

VIX Guard Core Hedge is an intraday strategy, so we can easily adjust its Money Management dynamically to the needs each time before the market opens.

Exposure

The average exposure of this sample strategy was only 6.13%, and it is intraday exposure that can be fully financed using the free intraday margin from the broker.

Winning Percent

The win rate is about 48%, and the average win is higher than the average loss (payout 1.3). However, in this strategy, what matters is not that, but WHEN the strategy earns and when it loses.

SL & TP

The strategy does not include a default SL, only a time-based exit at the end of the day. The problem with SL in this case is that it cannot be tested with daily data because it uses a Stop order and exits on the same day.

This article discusses the natural limitations of backtesting: here

You can, for example, add a protective SL at the 20% level, which has not been reached historically. This, of course, does not mean it won't be reached in the future.

In blue, I marked the worst intraday drawdowns (MAE) and their actual outcomes (assuming a constant investment of 10k).

The true safeguard of this strategy is the LONG positions, which should more than offset the losses.

Market Regime

Interestingly, the strategy achieves the best results in a Bull Market (SPY > SMA 200). It generally loses in a Bear Market. Therefore, adding a filter for this period could be beneficial for equity, but it would also result in the absence of a Hedge during this challenging period. If your strategies are out in the Bear Markets, it would also be advantageous to disable this strategy.

Trading Costs

In the conducted backtests, I assumed 0.1% for slippage and commission costs. You can read more about transaction costs here.

Recommended Instruments

VIXY or VXX, both work very similarly.

Pattern Day Trader

The strategy generates only Daytrade transactions. Although the strategy itself did not cause PDT in historical data (PDT Finder research), when combined with other strategies in the portfolio, it may trigger the PDT effect for accounts below $25k.

Strengths

• The strategy gains when the Long portfolio suffers significant losses. This provides natural cushioning of losses during moments that are most painful, both mentally and financially.

• It reacts quickly because it operates intraday — it doesn't need large trends, just short, sharp bursts of volatility.

• The construction is extremely simple and predictable. Zero filters, zero discretion. The strategy will either capture a volatility spike or end the session without a position.

• It helps maintain calm during difficult periods by removing some of the pressure from sudden drawdowns in the Long portfolio.

• It naturally complements both Trend Following and Mean Reversion Long.

Weaknesses

• Short data history – VIXY has only been available since 2011, so the backtest covers only one major bear market (COVID) + challenging years 2018, 2022, and a few deeper corrections. This limits the scope of statistical analysis.

• Constant "insurance cost" during calm periods – In long bull markets, the strategy generates a series of losses that reduce the portfolio's performance.

• Strong dependence on VIX futures specifics – VIXY relies on rolled futures contracts, which naturally "decay" over time. It's an instrument designed for short plays, not for long-term exposure holding.

• Risk of "mismatch" with your Longs – The hedge works best when stock declines coincide with a volatility explosion on the VIX. Sometimes the market declines gradually without a sharp VIX spike – in such cases, the strategy may not perform as expected. Other hedge strategies might be helpful here.

• Loss in a bear market – Historically, the strategy performs best in bull markets, and in a full-fledged bear market, it tends to lose more often. If someone actively trades during a bear market, this hedge won't always be the perfect "lifesaver" for that stage of the cycle.

• Sensitivity to parameters – Although the setting area is quite stable in terms of historically obtained Net Profit, other combinations of ATR period/multiplier can significantly change entry frequency and equity shape. Poorly chosen parameters can lead to frustration, so it's worth experimenting with them calmly.

• Potential technical and regulatory limitations – The strategy operates intraday and may increase the number of transactions, which, with small accounts, frequent trading, and other daily systems, might bring you closer to Pattern Day Trader limits.

• Risk of overestimating the hedge's role – Too large an allocation in the hedge strategy can "suppress" the entire portfolio's performance. It's a support tool, not a profit generator – if the position becomes too large, it may start to dominate other results in an unwanted way.

Summary

The use of this type of strategy is a bit of an advanced topic. It is more about the comfort and stability of the entire portfolio than about "earning from this one". Its task is simple: to appear when most of your long-term strategies are having problems. That's why it's crucial to adjust its share in the portfolio to your tolerance for declines and the operation of other systems.

If you have an edge built on Long strategies and want the periods of sudden downturns to be easier to handle, such a hedge is a natural complement. In small doses, it acts like a spice that enhances the entire "meal," but in too large a quantity, it can dominate its flavor and cause problems. Therefore, it's best to start with a small allocation and gradually check how it affects your equity, understanding of portfolio operation, and psychological comfort.

You can treat VIX Guard Core as quick first-contact insurance. It works when you want it to work, and on other days, it remains in the background. It's a pure protective function that strengthens the construction of the entire portfolio — and definitely not an attempt to "beat the market with one strategy."

If you still don't feel confident in applying this strategy and would like to consult your portfolio regarding the use of this or other strategies, I invite you to individual consultations.

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What you receive in the package for this strategy:

• The SQX file is ready for use on the Algocloud and StrategyQuant platforms.

• Pseudocode that describes all the rules in an easy-to-understand way.