Things to know before trading Huobi Options

- Options guides

Options trading involves leverage and can be quite complex. Therefore, it’s recommended that users have a basic understanding of options before trading.

**Understand Options**

Options are financial contracts that give buyers the right to buy or sell an asset at a predetermined price, either before or on a certain date (the Expiry Date).

Buyers need to pay a certain amount of assets called premium upfront to the options sellers. One thing to note is that **options premium is not the same as futures margin**, which is the amount of collateral required to open a futures position. **Once a user buys an options contract, the premium is spent and will not be returned to that user no matter which way the underlying asset’s price goes. **The user will profit if the earnings from exercising the options contract are higher than the paid premium.

**Call & Put Options**

Generally, there are two types of options: call and put options.

A call option is a derivatives contract giving the buyer the right but not the obligation to buy an underlying asset at a set strike price before or on the Expiry Date. Call option buyers typically anticipate that the price of the underlying asset will rise.

Suppose the underlying asset's price is greater than the strike price on the call before or on the Expiry Date. In that case, call option buyers can realize positive earnings by exercising their call option to buy the underlying asset at the lower strike price. If the call option is not exercised before the Expiry Date, it will be automatically settled on the Expiry Date. If the underlying asset’s price is less than the strike price at expiry, the buyer will not get any return.

*Settlement rules for a call option:*

*If settlement price **≤ strike price: payoff = 0*

*If settlement price > strike price: payoff = order quantity x (settlement price – strike price)*

Conversely, a put option is a derivatives contract giving the buyer the right but not the obligation to sell an underlying asset at a set strike price before or on the Expiry Date. Put option buyers typically anticipate that the price of the underlying asset will drop.

Suppose the underlying asset’s price is less than the strike price on the put before or on the Expiry Date. In that case, put option buyers can realize positive earnings by exercising their put option to sell the underlying asset at the higher strike price. If the put option is not exercised before the Expiry Date, it will be automatically settled on the Expiry Date. If the underlying asset’s price is greater than the strike price at expiry, the buyer will not get any return.

*Settlement rules for a put option:*

*If settlement price **≤ strike price: payoff = order quantity x (strike price - settlement price)*

*If settlement price > strike price: payoff = 0*

**An Example**

Alexa is bearish on Bitcoin (BTC). So, she buys a 0.001 BTC 7-day American put option with a strike price of 45,000 USDT for 1.87 USDT. The current Bitcoin price is 44,800 USDT.

Under the Open Position tab, the Est. Earnings of this position are 0.20 USDT, which means if Alexa chooses to exercise the option now by clicking “Settle”, she will earn 0.20 USDT from this position. Since she spent 1.87 USDT on buying the option, her P&L would be 0.20 – 1.87 = -1.67 USDT.

Alternatively, Alexa can hold on to this option and wait for the price of BTC to go lower. If, in 7 days, the price of BTC falls below 43,133 USDT, the breakeven price of this position, she will make a profit by exercising the option then.

**Key Options Terms**

Below are the definitions of some options terms that users will regularly encounter when trading Huobi Options.

**Underlying Asset **- The asset that the options contract derives its value from.

**Quantity** - The amount of an underlying asset represented in the options contract.

**Expiry Date **– The date the options contract will expire.

**Strike Price** - The price at which the buyer has the right to trade the underlying asset on or before the expiry date.

**Premium** - The price the buyer pays to purchase the options contract.

**Settlement Price** – The underlying asset’s Contract Index Price at 08:00 (UTC) on the expiry date.

**Breakeven Price **- The price that an underlying asset must reach for an option buyer to avoid a loss if they exercise the options contract.

**Target Price** - The price at which the system will automatically exercise the options contract.

**Est. Earnings** – The estimated earnings from this position if the options contract is exercised now.

**About Huobi Options**

Huobi Options are customized over-the-counter Bitcoin, Ethereum, and Dogecoin options products, and can be purchased on the Huobi official website and mobile app. They differ from traditional options products in that Huobi is the sole issuer of Huobi Options. Therefore, users can only be a buyer of Huobi Options. In addition, Huobi Options are cash-settled, which means that physical delivery of the underlying assets is not required when options are settled.