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What is Futures Volatility?

volatility futures chart

Volatility is a measure of market movement in either direction, relative to a “normal” market. In other words, if a futures market is moving up or down more than normal, it is considered to be volatile.

While volatility can sometimes be regarded as instability, it is actually an essential component of futures markets. When understood properly, volatility can provide opportunities for traders on both sides of the market.

What Causes Volatility in Futures Markets?

Since futures are derivative instruments, volatility in futures contracts is most often caused by factors that influence the price of their underlying assets.

Using crude oil futures as an example, a news event could occur which causes the price of oil to swing rapidly. Factors that trigger these price swings are often tied to oil production, supply and demand, economic policy changes, geopolitical tensions among oil-producing nations and/or oil-consuming nations and other fundamental influences.

Therefore, a highly volatile oil futures market is commonly caused by issues concerning its derivative asset, crude oil. It is generally considered in futures trading that:

  • An involatile market fluctuates within 1% (maximum 2%) within a single trading session.
  • A highly volatile market fluctuates more than 10% within a single session.

How is Volatility Measured?

Futures traders have several methods to detect volatility in a given market. Price action itself is a major indicator of volatility and becoming familiar with a market assists traders in detecting shifts in volatility.

  • Tip: To quickly gauge volatility in a futures market, reference the past 20-100 days of price action to get a feel for how the market moves regularly.

Benchmark volatility indexes are also commonly referenced by traders to assess volatility:

  • Chicago Board Options Exchange (CBOE) Volatility Index (VIX) – Also known as the fear gauge or fear index, the VIX is the most widely used volatility index and is based on S&P 500 index options. The more turbulent current price action is, the higher the VIX value will be. The more stable current market price action is, the lower the VIX value will be.
  • Nasdaq-100 Volatility Index (VOLQ) – Based on the tech-heavy Nasdaq-100 index, VOLQ provides 30-day implied volatility as expressed by certain listed options. Similar to the VIX, a lower value indicates reduced implied volatility and vice versa.

What is “Implied Volatility”?

Implied volatility simply refers to a forward-looking measure of volatility. That is, implied volatility captures the market’s opinion of higher or lower volatility in the near future.

Technical Indicators Used to Monitor Volatility

Any number of indicators can be used to track volatility and ultimately it will depend on your specific preferences. However, here are a few indicators commonly used among technical traders to track and identify volatility.

The chart above, created 100% FREE using NinjaTrader, displays daily price action in crude oil futures during a volatile period. In the top panel, Bollinger Bands help to indicate an increase in volatility when price breaks down beneath the lower band. In the bottom panel, the ATR indicator helps confirm this with a sudden spike in value. (Both circled in yellow above)

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