Cracking the 0DTE Code, Part 5: The z-Score Playbook

📘 Quick Glossary

Problem

Our original divergence indicator, especially the extrinsic element, worked best when implied volatility was compressing, the ideal “dealer-hedging environment.” On expansion days, the tool lost its edge:

• Bearish EX divergences could appear prematurely and fail.
• SPY could grind higher without a bullish signal as IV repriced upward.
• No clear “why” explained when a divergence wasn’t actionable.

The limitation wasn’t the indicator; it was a shift in the volatility regime.

Solution: z-Score Framework

The new Extrinsic Slope + z-Score Monitor adds missing context by revealing what the option’s IV is doing intraday.

• Extrinsic Slope: “Is IV compressing or expanding?”
  Negative slope = IV compression → dealer-hedging pressure / controlled sell. Positive slope = IV expansion → vol repricing or unwind flow.
• z-Score of Extrinsic: “Is premium high, normal, or cheap?”
  High z (+4 → +6) = over-inflated premium → potential vol-crush fade. Low z (−4 → −6) = deflated premium → potential unwind/bounce. Crossings of z = 0 often mark transitions between compression and expansion phases.

How to Interpret Dealer/MM Reactions with Context

For the first time, you can see the volatility regime forming in real time, not infer it afterward.

The Regime Context Returns

The extrinsic z-score completes the regime map from Part 2. It quantifies how IV evolves within each regime, whether dealers are expanding, compressing, or stabilizing IV as they hedge.

• R1: Neutral Gamma → direction comes from IV behavior.
• R4: Above Range (Short Calls) → bearish gap-fade or vol-crush continuation.
• R5: Below Range (Short Puts) → panic sell → bullish unwind reversal.

Slope shows what IV is doing; z-score shows how extreme it is.

z-Score + Slope Heuristics

• Rising z while SPY falls → volatility expansion / dealer-hedging pressure.
• Falling z while SPY rises → volatility compression or unwind.
• Flat z + negative slope → controlled compression / low-energy drift.

🟩 Regime 1: Inside Prior Range (Neutral Gamma)

Dealer posture: Balanced. Direction depends on IV behavior and z-score slope.

• Upside Breakout: z starts deeply negative (−4 → −2 → 0) and rises with SPY → IV expands with price → dealers hedge with the move → bullish continuation.
• Downside Breakout: z near 0 → falls negative while SPY drops → IV expands against price → dealers hedge against the move → bearish continuation.
• Compression Sell-Off: z extremely negative (−6 → −1) but SPY keeps drifting down on flat IV → bearish continuation. Wait for z to cross 0 + RVOL uptick before longing → bullish reversal zone once vol stabilizes.
• Controlled Compression Sell (R1-CC): z flat or slightly rising (−4 → −3), slope negative (compression), SPY drifting/falling as dealers sell vol → bearish bias.
• R1-VC (Vol-Crush Continuation): after an upside breakout, z peaks (+3 → +6) then fades toward +1 as IV compresses → vol-crush exhaustion often produces a sharp drop once IV collapses.

🟥 Regime 4: Opens Above Prior Range (Dealers Short Calls)

Dealer posture: Short call gamma → they short SPY as vol expands.

• R4-S (Standard Gap-Fade Start): z high (+3 → +5) then falls with SPY → IV expanding = bearish gap-fade.
• R4-C (Compressed Start): z starts negative (−3 → −4) and rises toward 0 while SPY drifts down. Rising z against falling SPY = IV repricing higher (not fresh hedging) → bearish bias until z flattens near 0.
• R4-R (Reversal / Unwind Phase): z starts elevated (+1 → +2), compresses to ~−2 as SPY fades. When z turns up and crosses above 0, dealers unwind short hedges → bullish reversal.
• R4-VC (Vol-Crush Continuation): z very high (+4 → +6) then falls while SPY grinds up → IV collapsing = bullish continuation as dealers stop hedging.

🟦 Regime 5: Opens Below Prior Range (Dealers Short Puts)

Dealer posture: Short put gamma → they must buy SPY on declines.

• R5-E (Expansion Start / Capitulation): z very negative (−4 → −6) = vol expansion and panic hedging → bearish leg down.
• R5-C (Compressed Start / Controlled Buy): z flat (−3 → −2) and slope slightly positive; SPY grinds up slowly → bullish continuation from open until z stalls/turns down.
• R5-R (Reversal / Unwind Phase): z curves up (−6 → −2 → −1) as SPY fades lower; IV begins re-expanding as dealers start buying → bullish unwind as hedges flip near z ≈ −1.

Note: R5 typically transitions from panic expansion to compression and unwind (R5-E → R5-C → R5-R) without the extended vol-crush continuation seen in R4.

Time-of-Day Edge

• 09:30–10:00: IV repricing chaos → mostly avoid trades.
• 10:00–12:30: Prime window → gamma stable, IV measurable.
• 12:30–13:30: Low RVOL → skip choppy compression.
• 15:30+: Charm magnets → quick ATM scalps only.

Most A-setups appear between 10:00–11:00 when IV stabilizes and hedging flows normalize.

Why SPY Implied Volatility and VXX Don’t Work (as Triggers)

Those proxies track index-level implied vol, not the live premium structure of the exact option you’re trading. You must read extrinsic value from the option itself. That said, using VXX key levels (PML, PMH, YDL, YDH) can help with exits. These often align with short-term vol spikes or compressions that mark the end of a move.

Final Thoughts

This update bridges all five parts of the series:

• Part 1: MM Gamma → 0DTE flow = dealer positioning + gamma exposure + intraday vol shifts.
• Part 2: The Regime Model → Know the environment.
• Parts 3–4: The Divergence Tool → See the turning points.
• Part 5: The z-Score Playbook → Understand why/when the turn is happening with higher accuracy.

Each divergence becomes a window into dealer positioning, volatility repricing, and flow intensity, not just a pattern.

Together, slope and z-score act as the volatility compass: slope tells you what IV is doing; z-score shows how extreme (or balanced) it is.

📘 Full chart examples and annotated z-Score patterns are included in the Foxchase Regime Framework document (free in Discord or included with the indicator on Whop).

(For educational use only. No performance guarantees.)