A worst-of option in the form of a call; it is a call on the worst performing stock or asset in a basket or index. It has a lower payoff potential vis-à-vis a call on an identical basket/ index. Therefore, it is cheaper than a vanilla basket call. A worst-of call option can be used by an investor seeking to maximize the return based on the worst performance of a specific underlying stock in the basket/ index.
The payoff of a worst-of call is given by:
WO call payoff = max [min(S1(T) , S2(T) , …. , Sn(T)) – K, 0]
Where: K is the option’s strike price, Sn(T) is the market price of stock number (n) at maturity T.
