Understanding Option Exercise
Exercise occurs when the option buyer requires the seller to fulfill the contract terms. Let's revisit an example:
Xiao Kunkun paid 50 USD to purchase an option from Xiao Jiu, granting him the right to buy a bracelet for 100 USD in 2 months.
- Scenario 1: If the market price later rises to 800 USD, exercising yields 700 USD profit → Exercise occurs.
- Scenario 2: If the price drops to 80 USD, exercising causes a 20 USD loss → No exercise.
Key Insight: Exercise happens only when profitable (excluding the option fee).
OKEx Option Exercise Profit Formulas
Call Options
Profit = (Settlement Price − Strike Price) × 0.1 × Contracts ÷ Settlement Price
Put Options
Profit = (Strike Price − Settlement Price) × 0.1 × Contracts ÷ Settlement Price
Definitions:
- Strike Price: Contract-specified price (e.g., 7000 USD for BTC).
- Settlement Price: The arithmetic mean of the underlying index’s price during the final hour pre-settlement (similar to futures contracts).
Practical Example
Xiao Kunkun buys 20 BTC call options (Strike: 7000 USD). At exercise:
- Settlement Price: 8000 USD
- Profit = (8000 − 7000) × 0.1 × 20 ÷ 8000 = 0.25 BTC
FAQs
Q1: Why might an option seller transfer their position?
A: Sellers can profit by selling the option itself if its market value rises, avoiding potential exercise losses.
Q2: How is settlement price determined?
A: It’s the hourly pre-settlement average—ensuring fairness and market alignment.
Q3: Are fees included in profit calculations?
A: No. Formulas evaluate gross profit; fees are deducted separately.
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