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IQ options differ from vanilla options in that traders are not given an opportunity to hold a position in the underlying asset. Instead, profits and risk are typically fixed on a per option basis — the overall profits are not affected by the extent of movement in the underlying price of the asset, only whether or not it was above or below the strike price.
How IQ Options Work
Mot IQ options are traded outside of the U.S., and they can be used as speculation for a suite of assets such as stocks, bonds, commodities, and currencies. They are very straightforward but contain nuances depending on the broker and in what jurisdiction you are trading.
For example, IQ options trading via a regulated American exchange would work as follows for a forex option.
If Exchange A offers IQ options in the U.S., all the options would either expire at $100 or $0 with traders capable of exiting before the expiry of the contract. A IQ option presented to a trader for the EUR/USD trading pair would be
Traders can either choose to buy or sell the option. If they buy, then they expect the price of the EUR in USD to be above 1.2000 at 12 AM on April 1st, 2019. If they sell, then they presume the price of EUR in USD will be equal to or below 1.2000 at the contract’s expiration on April 1st, 2019.
If Alice expects the EUR/USD pair to be above 1.2000 at the expiry date, and the current ask price is $40 for the option, she can buy the option contract for $40. If the EUR/USD pair trades at higher than 1.2000 at the expiration date, then Alice’s contract is now worth $100. Subtract her $40 from $100 and her profit is $60. If the pair trades below 1.2000 at the time of expiration, Alice loses her $40.
In American options., Alice can exit her position before the April 1st, 2019 deadline — in European IQ options, she cannot. For reference, not all IQ option outlets operate with $100 IQ options, but that is the standard and is what U.S. IQ exchanges like Nadex use.
Alice could even acquire multiple IQ options for her position. So, if she bought 3 of the same trading pair options, her cost would be $120 for a potential profit of $180.
Notably, Alice’s losses will never exceed the amount she spent on the option (i.e., $40), presenting a discernable risk/reward ratio before making the trade. Her profit or loss does not depend on the extent of the trading pair’s movement, only that it is above or below a certain threshold — payouts are fixed.
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