A worst-of option (WO option) in the form of a put; it is a put on the worst performing stock or asset in a basket or index. It has a higher payoff potential vis-à-vis a put on an identical basket/ index. Therefore, it is more expensive than a vanilla basket put. A worst-of put option can be used as an indirect hedge on a single stock position where the holder is contractually restricted from establishing a direct hedge for a given period .
The payoff of a worst-of put is given by:
WO put payoff = max [0, K – min(S1(T) , S2(T) , …. , Sn(T))]
Where: K is the option’s strike price, Sn(T) is the market price of stock number (n) at maturity T.
