Futures Implied Volatility: What It Actually Means
Implied volatility (IV) tells you the market’s expectation of future movement. Not direction—just magnitude. Traders screw this up constantly. IV is not fear, not momentum, and not a trend indicator. It’s the market’s best guess at how much price will swing.
What Implied Volatility Actually Measures
Implied volatility is reverse-engineered from options prices on futures contracts. Higher options premiums = higher IV. Lower premiums = lower IV.
It answers one question: “How much movement is expected between now and expiration?”
| IV Level | Meaning |
|---|---|
| Low IV | Market expects calm, small ranges |
| High IV | Market expects volatility spikes, wide ranges |
If you need earlier context, review How Circuit Breakers Trigger to understand what forces volatility extremes.
Why Futures Traders Care About IV
You don’t need to trade options to benefit from IV. Futures traders use it to gauge:
- risk per trade
- expected range size
- stop placement
- position sizing
- when volatility compression is about to break
How IV Predicts Expected Daily Range
One of the best uses of IV is the expected move calculation. High IV = bigger expected move. Low IV = smaller.
Expected move gives you a ballpark of how far the market might travel in a day without being “unusual.”
Why IV Spikes Happen
IV spikes when:
- big news approaches
- markets gap violently
- liquidity collapses
- uncertainty is high
Traders price in chaos before it happens.
Why IV Crashes After Big Events
After major news hits—CPI, FOMC, NFP—IV drops fast. Not because the market calms down immediately, but because uncertainty disappears.
The market now knows the number, so expected future movement shrinks.
IV vs. Actual Volatility (Big Difference)
Implied volatility = projected movement. Actual volatility = what price actually did.
IV can be wrong. Actual volatility never is.
Final Takeaway: IV Is the Market’s Forecast
Implied volatility doesn’t predict direction. It predicts the size of the fight. High IV means large swings are expected. Low IV means a quiet grind. Learn it, and you understand the battlefield before stepping in.