In my Wednesday post I introduced the Z-Score and also explained how we use it for scoring implied volatility, making it the IVZ-Score. What I didn’t focus on much is why one would do such a thing in the first place, and the underlying purpose may not be immediately apparent to some. Now I already can sense your eyes glazing over plus it’s Friday, so I’ll promise to make this brief and actionable for non-nonsense traders mainly interesting in turning a buck.
The implied volatility Z-score is a way of framing implied volatility in context. For example, today SPY closed up 0.35%, which is decent but nothing compared with some of the candles over the past few months. But how normal or abnormal is it? We don’t know unless we’re able to put it in context.
I was born with a fairly pale complexion which has always forced me to stay out of the sun lest I end up looking like a roasted chicken after only minutes of being exposed to a UV index anywhere above 5. It’s not that I hate the sun – rather the sun seems to hate me, or at least it hates my skin as it insists on burning it. As a financial blogger who also trades for a living it’s easy to understand that summer is my least favorite season of the year.
Big tech was stomped again over the past few sessions but the current retracement still lies within the parameters of a regular late summer shake down. What is a bit more disconcerting to me is the marked increase in realized (historical) volatility, which usually is indicative of a late stage bull market top. Since big tech has been leading this rally this would have major implications to equities across the board.