Performance of a Stock Basket, Component Stocks and Payout of an Equity Basket Put
An option on a portfolio consisting of more than one stock or stock market index. Portfolios or baskets can be composed of stocks from one or a few industries, or they can be designed to replicate broad market indexes. In the latter case, a basket may be used rather than the full index because some index components do not trade actively or are subject to substantial market impact. One basket application combines several indexes to make a basket of indexes.
Apart from baskets designed to replicate or combine indexes, the primary motivation for trading a basket is that an investor expects the index or other grouping of stocks incorporated in the portfolio to move significantly over the life of the option. The investor wishes to take advantage of the fact that premiums are usually lower on basket options than on separate options on each of the basket's components. See also Basket.
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