A basket option whose underlying is a portfolio consisting of a set of stocks or based on a stock index. The component stocks may belong to a specific sector/ industry or a few sectors/industries. Furthermore, the stock portfolio can be constructed so as to replicate a particular market index, wholly or partially. Generally speaking, a section of an index is often used instead of the broader index due to the fact that some component stocks need not necessarily be actively traded on exchanges.

The value of an equity basket option is sensitive to the volatility of underlying stocks and the correlation among individual stocks. Equity basket options are normally held by investors who expect a basket of stocks to move substantially during the option’s life. To that end, they attempt to avail of the lower premiums on basket options with respect to that on stand-alone options on each component stock.