The 20-year-old attacking midfielder spent last season on loan at Portuguese side Porto, where he played under Wolves head coach Nuno Espirito Santo.
Jota started his career in his homeland with Pacos Ferreira and joined Atletico on a five-year deal last summer.
"This is a good opportunity for me," he told the club website.
Jota was a team-mate of another of Wolves' summer signings Ruben Neves at both Porto and for the Portugal Under-21 side during this summer's European Championship.
He scored nine goals in 35 appearances for Porto last season, including one in their 5-0 Champions League victory over Leicester City in December.
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Wolves have completed the signing of Portugal Under-21 international Diogo Jota on a season-long loan from Atletico Madrid.