Convert an Implied Volatility Quote Into Expected Moves
Posted: Wed Oct 28, 2026 6:41 pm
Convert an Implied Volatility Quote Into Expected Moves
One-month implied volatility on EUR/USD is quoted at 7.2 percent annualized. The spot rate is 1.1000. What does the options market expect in terms of pips?
Convert to daily. Divide by the square root of the number of trading days in a year, about 252, which is 15.87, often rounded to 16. Daily one-sigma move: 7.2 divided by 15.87, about 0.454 percent. On 1.1000, that is 0.00499, about 50 pips.
Convert to monthly. Divide the annual figure by the square root of 12, which is 3.46: 7.2 divided by 3.46, about 2.08 percent, or about 229 pips.
Interpret. A one-sigma move is a range that is exceeded about one-third of the time under a normal assumption. So the market expects a typical daily move around 50 pips, and a typical monthly range of roughly plus or minus 229 pips.
Compare with realized volatility. If the actual average daily range recently has been 70 pips, the implied number may seem low, but a range measure from high to low is larger than a close-to-close standard deviation, so they are not directly comparable. A close-to-close realized volatility would be the correct match.
When implied volatility rises, the market expects bigger moves, and stops and targets should widen.
Before a major event, implied volatility often rises, and falls afterward.
Exercise: find the implied volatility for your pair and convert it to a daily pip estimate.
One-month implied volatility on EUR/USD is quoted at 7.2 percent annualized. The spot rate is 1.1000. What does the options market expect in terms of pips?
Convert to daily. Divide by the square root of the number of trading days in a year, about 252, which is 15.87, often rounded to 16. Daily one-sigma move: 7.2 divided by 15.87, about 0.454 percent. On 1.1000, that is 0.00499, about 50 pips.
Convert to monthly. Divide the annual figure by the square root of 12, which is 3.46: 7.2 divided by 3.46, about 2.08 percent, or about 229 pips.
Interpret. A one-sigma move is a range that is exceeded about one-third of the time under a normal assumption. So the market expects a typical daily move around 50 pips, and a typical monthly range of roughly plus or minus 229 pips.
Compare with realized volatility. If the actual average daily range recently has been 70 pips, the implied number may seem low, but a range measure from high to low is larger than a close-to-close standard deviation, so they are not directly comparable. A close-to-close realized volatility would be the correct match.
When implied volatility rises, the market expects bigger moves, and stops and targets should widen.
Before a major event, implied volatility often rises, and falls afterward.
Exercise: find the implied volatility for your pair and convert it to a daily pip estimate.