The "Hit" frame defines the area which will react to the mouse. It can be as big or small as you like, but it's best to ensure that the frame contains a solid shape that is large enough to surround all the images you have place in the button's frames. In terms of the circle, you want the whole circle to interact with the mouse so a copy of the circle image in this state will suffice.
Note: The objects in the "Up" frame will be used as the "Hit" frame if you do not specify a "Hit" state.