Derivatives trading—whether in the form of futures or options—plays a crucial role in modern cryptocurrency markets. As traders seek to hedge risk or speculate on price movements, understanding how contracts settle or are exercised at expiration is essential. This guide breaks down the settlement and exercise mechanics for coin-margined futures, USDT-margined futures, and coin-margined options, ensuring you’re equipped with accurate knowledge before entering any position.
How Settlement and Exercise Work
When a coin-margined futures contract, USDT-margined futures contract, or coin-margined options contract reaches its expiration time, the platform initiates an automated process to close all open positions and settle outstanding obligations.
The key component in this process is the settlement price (for futures) or exercise price (for options). This price is calculated using the arithmetic average of the index price sampled every 200 milliseconds during the final hour before expiration. By using a time-weighted average, the system minimizes volatility spikes and manipulation risks, ensuring a fair valuation.
Once this reference price is determined, all open positions are cash-settled—meaning no physical delivery of assets occurs. Instead, profits or losses are calculated and credited or debited directly to the user’s account balance in the underlying cryptocurrency.
👉 Discover how real-time settlement pricing protects your trades from market manipulation.
What Happens to Open Orders at Expiration?
If you have unfilled limit orders active when the contract expires, those orders are automatically canceled. The system does not carry them over to the next contract cycle.
Additionally, any remaining open positions—long or short—are forcibly closed at the final settlement or exercise price. This ensures that every user’s position is resolved cleanly at expiry, with gains or losses reflected immediately in their wallet balance.
It’s important to monitor your open orders and positions as expiration approaches. Failing to manage them proactively may result in unintended outcomes due to automatic processing.
Example 1: Coin-Margined Futures Settlement
Let’s consider a practical example involving a BTCUSD weekly futures contract.
Scenario: Trader O opens a long position on BTCUSD Weekly (expiring December 4) at $15,000, holding 1,000 contracts until expiration at 16:00 HKT.
Each contract has a face value of 100 USD, and the final settlement price—calculated from the index average between 15:00 and 16:00 HKT—is $19,000.
To calculate Trader O’s profit:
Profit = (Face Value × Contract Count / Entry Price) − (Face Value × Contract Count / Settlement Price)
= (100 × 1,000 / 15,000) − (100 × 1,000 / 19,000)
= 6.6667 − 5.2632
= **1.4035 BTC**After settlement:
- The BTCUSD Weekly (1204) long position is removed.
- Trader O’s account receives +1.4035 BTC (before accounting for fees).
This demonstrates how futures profits in coin-margined contracts are paid out in the base cryptocurrency (BTC), not in stablecoins or fiat.
Example 2: Coin-Margined Options Exercise
Now let’s examine an options scenario with a put option.
Scenario: Trader K holds a short position in 100 contracts of ETHUSD-20201204-600-P (a put option with strike price $600), held until expiration at 16:00 HKT.
The final exercise price—based on the index average from 15:00 to 16:00—is $580, which is below the strike price. Therefore, the option is in-the-money, and it will be exercised.
As the seller (writer) of the put option, Trader K must fulfill the obligation. The payout is calculated as:
Payout = Face Value × Contract Multiplier × Position Size × (Strike Price − Exercise Price) / Exercise Price
= 1 × 1 × (-100) × (600 − 580) / 580
= -100 × (20 / 580)
= **-3.4483 ETH**After exercise:
- The short put position is closed.
- Trader K’s account is debited 3.4483 ETH (excluding fees).
This illustrates the risk involved in selling options: while premium income is limited, potential losses can be substantial depending on market movement.
👉 See how professional traders manage options risk before expiration.
Handling Negative Balances: Auto-Deleveraging and Insurance Funds
In extreme market conditions, large price swings during the final hour can lead to significant losses—sometimes exceeding a trader’s available margin. In such cases, a user’s account balance could theoretically go negative after settlement or exercise.
However, most reputable platforms employ a risk mitigation mechanism:
- The system uses its insurance fund (or risk reserve) to cover negative balances resulting from forced settlements.
- A corresponding transaction record labeled “Settlement Bankruptcy Coverage” or “Exercise Bankruptcy Coverage” is added to the user’s ledger.
- This prevents cascading defaults and maintains overall market stability.
While users won’t be held liable for further payments beyond their deposited margin, frequent exposure to high-leverage positions increases the likelihood of triggering such events—which may affect eligibility for certain trading tiers or features.
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Frequently Asked Questions
Q: What time is used for contract expiration?
All expirations occur at 16:00 HKT (Hong Kong Time) unless otherwise specified. Make sure your local clock is synchronized to avoid timing errors.
Q: Is physical delivery involved in these contracts?
No. All settlements are cash-settled in the underlying asset (e.g., BTC or ETH). There is no requirement to deliver or receive actual coins beyond the profit/loss transfer.
Q: Can I roll over my position to the next contract?
The platform does not automatically roll positions. You must manually close your current contract and open a new one for a later expiry date.
Q: Why is the settlement price based on a 200ms sample average?
Sampling every 200 milliseconds over one hour creates a robust, tamper-resistant reference rate that reflects true market conditions and reduces manipulation risk.
Q: What happens if my position is deep in-the-money?
Deep in-the-money positions will be settled or exercised as normal. Profits or losses are calculated precisely based on the final settlement/exercise price.
Q: Do I need to take action before expiration?
While automatic settlement occurs for all holders, it’s wise to review your portfolio ahead of expiry—especially if you want to avoid automatic closure or manage tax implications.
👉 Stay ahead of expiration dates with advanced trading tools and alerts.
Final Thoughts
Understanding how derivatives are settled or exercised is fundamental to successful crypto trading. Whether you're holding coin-margined futures or writing options contracts, knowing the mechanics behind price determination, payout calculation, and risk management empowers better decision-making.
By relying on transparent, algorithmically derived settlement prices and robust insurance mechanisms, platforms aim to create a fair and stable environment—even during volatile market periods.
Always remember: preparation beats reaction. Monitor your positions, understand the formulas behind payouts, and use tools wisely to navigate expiration cycles confidently.