Huobi Options Trading Tutorial – American options

What are American options?

American options, aka American-style options, are options contracts that allow users to exercise the option rights at any time before or including the expiration date. They differ from European-style options as the latter only allow execution on the day of expiration. American options are preferable to users who expect a substantial, trend-like move in the underlying asset's price.

American options offer two product types: Call and Put, which reflect the users’ view, bullish or bearish, on the underlying asset. Buyers of American options contracts will make a profit if the underlying asset's price moves in their favor and the earnings from the options contract are greater than the paid premium. Buyers can lock in profits by exercising the options at a certain time before expiration or setting up a target price that triggers the automatic exercise of the option once the underlying asset’s price hits the target price.

 

Why buy American options?

American options are versatile financial products. Users can use American options to speculate on future price movements of an underlying asset at a much lower cost than the asset itself and hedge or reduce the risk exposure of their existing positions. The most buyers of American options contracts can lose is the premium paid upfront, no matter how unfavorably the price goes.

 

How to buy American options?

Huobi offers American options on both the Huobi Global website and the Huobi Global mobile app. On the Huobi Global website, users can purchase American options with fully customizable strike price and expiration date. On the Huobi Global mobile app, users can only purchase intraday or long-term, at-the-money, American options.

 

Buy American options on the Huobi Global website

1. Go to Huobi Global’s official website: https://www.huobi.com/en-us/, move the cursor to “Derivatives” on the upper navigation panel, and click “Options”. Or go directly to this link: https://www.huobi.com/en-us/otc-option/exchange

2. Click “American Options” from the Option Selection Bar.

3. Click on the Asset icon located at the upper left corner to select the underlying asset of the options contract.

4. Set up American options contract specifications, such as Call or Put, Strike Price, Expiry Date, Quantity, and Target Price.

5. Check the box to agree to the Options Agreement, click "Get a quote" to get a price offer for the options contract. Click “Buy” to purchase the options contract if you are pleased with the deal.

 

Buy American options on the Huobi Global mobile app

1. Open the Huobi Global app, log in, go to “Derivatives”, then tap “Options” to open the trading interface.

2. Tap the Index icon located at the upper left corner to select the underlying asset of the options contract.

3. Select the options contract duration from the Option Duration Bar.

4. Enter the quantity of the options contract in the blank box below the price chart.

5. Tap “Call” or “Put” to purchase the options contract.

 

Call 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 within a specific timeframe. Call option buyers are bullish on the underlying asset and believe the price will rise above the breakeven price before the option expires.

When the underlying asset's price is greater than the strike price on the call before or on the expiration date, call option buyers can realize positive earnings by exercising their call option to buy the underlying asset at the lower strike price. When the underlying asset’s price is less than the strike price, the call expires with no value.

 

The possible profit and loss for a call option buyer are illustrated in the following diagram:

For a call option (assume order quantity is 1):

Max profit = settlement price - strike price - premium paid

Max loss = premium paid

Break-even price = strike price + premium paid

 

Settlement rules:

If settlement price strike price: payoff = 0

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

 

Case study for Call Options

Assume $ETH is currently trading at 3,261 USDT. Alexa believes the price of $ETH will rise by 300 USDT in 7 days. She buys a Call option on the Huobi Global website for 1,698 USDT with the following terms:

Strike Price: 3,200 USDT

Expiry Date: 7 days from today

Quantity: 10 ETH

Scenario 1: The market is very bullish. $ETH price rises to 3,700 USDT when the options contract expires. Alexa makes a profit of [10 x (3,700 USDT – 3,200 USDT)] – 1,698 USDT = 3,302 USDT.

Scenario 2: The market is fluctuating. On day 3, $ETH price reaches 3,400 USDT, the highest price in 3 days, for a moment. Alexa exercises the options contract at that time and makes a profit of [10 x (3,400 USDT – 3,200 USDT)] – 1,698 USDT = 302 USDT.

Scenario 3: Alexa’s view on the market turns out to be wrong. $ETH price drops to 3,000 USDT and fails to go up before expiration. Alexa receives nothing in return and loses 1,698 USDT.

 

Put Options

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 within a specific timeframe. Put option buyers are bearish on the underlying asset and believe the price will fall below the breakeven price before the option expires.

When the underlying asset's price is less than the strike price on the put before or on the expiration date, put option buyers can realize positive earnings by exercising their put option to sell the underlying asset at the higher strike price. If the underlying asset’s price is greater than the strike price, the put expires with no value.

 

The possible profit and loss for a put option buyer are illustrated in the following diagram:

 

For a put option (assume order quantity is 1):

Max profit = strike price - settlement price - premium paid

Max loss = premium paid

Break-even price = strike price - premium paid

 

Settlement rules:

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

If settlement price > strike price: payoff = 0

 

Case study for Put Options

Assume $BTC is currently trading at 42,594 USDT. Bob believes the price of Bitcoin will crash in 3 days. He buys an “at-the-money” (strike price = current price) put option on the Huobi Global mobile app for 1,197 USDT with the following terms:

Options Duration: 3 days

Quantity: 1 BTC

 

Scenario 1: Bob’s view on the market turns out to be wrong. The market is quite bullish. $BTC price rises to 45,000 USDT when the options contract expires with no value. Bob loses the premium paid for the options contract (1,197 USDT).

Scenario 2: The market is fluctuating. On day 1, $BTC price reaches 41,500 USDT for a moment. Bob exercises the options contract at that time and loses 1197 - [1 x (42,594 USDT – 41,500 USDT)] = 103 USDT.

Scenario 3: The market crashes. $BTC price plummets to 32,000 USDT when the options contract expires. Bob makes a profit of [1 x (42,594 USDT – 32,000 USDT)] – 1,197 USDT = 9,397 USDT.

 

Some other things to know about American options

Compared to European Spread options with similar terms, American options generally have greater return potential and cost more to purchase. The premium on an American option will generally be greater given a more favorable strike price, more time to expiration, and greater implied volatility.

If a buyer does not exercise an American option before expiration, the options contract is automatically settled on the expiration day according to the Settlement rules.

 

 

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