Implied Volatility

Implied volatility (IV) is a forward-looking metric derived from options prices that reflects the market's expectation of how much an asset's price will move over a given period. Unlike historical volatility, which looks at past price movements, implied volatility represents the market's consensus on future uncertainty. Higher implied volatility generally indicates greater expected price swings.

Before a major economic announcement such as a central bank interest rate decision, implied volatility on currency pairs like EUR/USD tends to spike, reflecting the uncertainty surrounding the outcome. Options traders use implied volatility to price contracts and assess whether options are cheap or expensive relative to expected moves. For futures and CFD traders, monitoring implied volatility levels can help gauge how much price movement to expect and adjust position sizes accordingly, particularly in prop trading, where managing drawdown is critical.