Out of Missiles, Switching to Guns

How shorter signals and zero days-to-expiry options are reshaping volatility strategies

The transition to Tuttle Ventures Newsletter 2.0 is in full swing.

I’ll be taking myself far less seriously this time.

My goal is simply to write because I feel compelled to get ideas on paper and share what’s been on my mind.

The weekend began with some father-son golf, followed by catching up on the latest in volatility research.

Long Tail Alpha's has a new paper out: "Relationship Between Trend-Following and Options” by Vineer Bhansali.

The paper explores how systematic timing rules, like those used in trend-following, can enhance a purely options-based strategy.

I've admired Vineer's work for its practical approach—more like a cookbook than a textbook.

Vineer argues that incorporating trend-following techniques may improve the performance and risk management of options strategies, offering a systematic approach to navigating market volatility and directional uncertainty.

Intuitively it makes sense…

Emanuel Derman emphasizes that a volatility strategy is only as good as its ability to model the volatility surface across space and time accurately.

Matching the volatility surface with a precise trend-following strategy may be a powerful tool for options traders.

The Importance of Signal Timing Length

One of the key insights from the paper is that signal timing matters—and it matters a lot.

For trend-following strategies to mimic the behavior of options, their exposures must systematically adjust, increasing or decreasing based on the signals. The length of the signal—whether short, medium, or long-term—can drastically impact performance and what market behavior the strategy captures.

Shorter Signals and Zero Days-to-Expiry (0DTE) Options

To illustrate, consider zero days-to-expiry (0DTE) options. With these ultra-short-term options, traders have only a small runway to align implied volatility (expectations of future movement) with realized volatility (what actually happens).

Everything is compressed into a single trading day.

This reminds me of a scene from Top Gun.

In the heat of a dogfight, Maverick can’t lock onto the enemy because the target is too close. Instead of relying on long-range missiles, he switches to guns—a more precise tool for short-range combat.

The same principle applies to short-term trend-following strategies.
If you need to “zero in” on realized volatility in a tight timeframe, you switch to a more responsive tool—like short-dated options or shorter signal timing lengths.

As traders have turned to shorter-dated options to capitalize on realized volatility given the relative underperformance of implied volatility, it has opened systematic trends that show robust risk premia out of sample.

Market Models and Trend Signals

The paper explores three simple market models that can drive significant price movements:

1. Constant positive drift: A steady upward trend.

2. Positive autocorrelation: Recent returns tend to persist in the short term.

3. Time-varying drift: Trends that change over time.

Vineer examines three trend signals of varying lengths: a short-term 10-day moving average (MA), a medium-term 50-day MA, and a long-term 200-day MA.

The trend positions are binary, taking values of +1 or -1 depending on whether the closing price is above or below the moving average.

Here is the breakdown exhibit of the simulated portfolio performance from the paper.

The paper found that longer-term signals tend to profit from drift, while shorter-term signals capitalize on positive autocorrelation (middle column).

In simple terms, if an asset went up today, it’s more likely to go up tomorrow; if it went down today, it’s more likely to go down tomorrow.

This short-term persistence gives traders an opportunity to exploit trends quickly and systematically.

In today’s market, it seems like traders are focusing more on those quick moves, especially with options that expire in a day or less.

Short-term signals may feel like a sprint, but in today’s market, they’re proving to be one of the sharpest tools for navigating volatility and capitalizing on quick trends.

Read the full paper here.

Thank you for reading—your time and attention are greatly appreciated, and I look forward to sharing more insights with you soon.

Best,

Darin Tuttle, CFA

This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.