How to Read a Volatility Quote

The number is a price, not a forecast

When a commentary says options on a pair are trading at a certain volatility, it is quoting a price. The figure is extracted from the premiums people are paying, using an agreed pricing model, and expressed as an annualised percentage. It describes how much movement is being paid for between now and the contract's expiry. That is a market's willingness to pay, which is a fact about the present, not a claim about the future. Reading it as a prediction is the mistake the rest of this guide is arranged to prevent, and the reason so much of what follows is about conventions rather than levels.

Why the quote is in volatility rather than money

Currency options are quoted in volatility because a cash premium is not comparable to anything. A premium depends on the current rate, the notional and the pair, so two premiums tell you almost nothing side by side. A volatility quote strips those out and leaves the one dimension the market is actually trading. The cash amount is then computed from it with a model and current inputs. This is why the quoted number can sit still while the premium moves all day, and why option talk is full of percentages that are not price changes and should never be read as one.

One pair has many volatilities, not one

There is no single volatility for a currency pair. Every combination of strike and expiry has its own, and together they form a surface. Longer expiries and shorter ones can disagree, because the market may expect calm this week and something else next month; strikes near the current rate and far from it can disagree too. So a headline number is always a number for something specific, and a comparison between two of them is only meaningful if both describe the same point on that surface. When a figure arrives without its strike and expiry attached, the missing half is the part that would have made it usable.

The shape has names

Plot implied volatility against strike for one expiry and the line is not flat: strikes away from the current rate usually carry more. That curve is the smile, and when it leans clearly to one side it is called a smirk or skew. Two quoted numbers summarise it. A risk reversal is the difference between matching strikes either side of the current rate, so it says which direction of protection is being paid up for. A butterfly compares the outer strikes with the middle, so it says how much the market is paying for a large move in either direction. Both are described as the market's positioning, not as its opinion.

What the number cannot tell you

Implied volatility carries no direction: the same reading is consistent with a market braced for a rise and one braced for a fall. It is not a probability that any outcome occurs, and it is not a forecast that the market will be right — expensive volatility ahead of an event says only that protection was in demand, whatever happened afterwards. It also says nothing about timing within the contract's life. And because it is extracted with a model, it inherits that model's assumptions, which is why the same option can carry two different implied volatilities on two systems without either being wrong.

Where the figures actually come from

For listed contracts, the exchange is the source: it publishes settlement prices, volume and open interest for its currency futures and options, along with the contract specification that says what each contract is. That is public, dated and checkable. The over-the-counter market has no equivalent, because there is no venue to do the publishing — quotes there are made by dealers to their own clients and reach outsiders only through data providers, which are generally commercial, or through commentary, which is second-hand and rarely says which convention it used. A volatility figure of unknown origin is not a data point; it is a claim.

Model, convention, date

Three things travel with any volatility number, and a source that omits them is asking to be trusted rather than read. The model, because the figure is an output of one and comparable only to figures from the same one. The convention: which strikes define a quoted risk reversal or butterfly, whether at the money means measured against spot or against the forward, and how the annualisation is done. And the date, because a volatility surface changes daily and a level quoted from an undated article describes a market that has since moved on. Every one of those is stated by whoever publishes the quote, which makes the publisher's own documentation the thing to read before the number is worth anything.