How do I use a "basket" option?

By Bob Schneider AAA
A:

A basket option is an option with an underlying asset "basket" of securities, currencies or commodities. Basket options are a popular way to hedge portfolio risk. Meanwhile, using the basket option costs significantly less than buying an option on the individual components of the portfolio.



Basket options often are used as a cost-effective way for portfolio managers to consolidate multicurrency exposures. This works because a basket option offers the unique characteristic of a strike price based on the weighted value of the basket of currencies, calculated in the buyer's base currency. The buyer chooses the maturity of the option, the foreign currency amounts for the basket and the aforementioned strike price.



(For more on this topic, read Options Basics.)



This question was answered by Bob Schneider.



RELATED FAQS

  1. How is the Accumulative Swing Index calculated?

    Learn how the accumulative swing index is calculated using swing index. Explore absolute value and how it is used in the ...
  2. What are the differences between a bar chart and candle sticks?

    Explore the difference between bar and candlestick charts. Learn how technical analysts use charts in the analysis of supply ...
  3. How is accumulation area calculated?

    Explore the use of accumulation areas in the analysis of traded securities. Learn about on-balance volume and its role in ...
  4. What are the best indicators for evaluating technology stocks?

    Technology stocks are often some of the most discussed stocks on the news. How can investors spot the company that will roll ...
RELATED TERMS
  1. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  2. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  3. Short Put

    A type of strategy regarding a put option, which is a contract ...
  4. Mass Index

    A form of technical analysis that looks at the range between ...
  5. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
Related Articles
  1. Stock Safety: Top 3 Ways to Limit Your ...
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your ...

  2. Applying Binary Options To Equity Markets
    Options & Futures

    Applying Binary Options To Equity Markets

  3. Can You Buy Stock Insurace? 3 Strategies ...
    Options & Futures

    Can You Buy Stock Insurace? 3 Strategies ...

  4. ETF Options Hedge Risk of ETF Trades
    Mutual Funds & ETFs

    ETF Options Hedge Risk of ETF Trades

  5. Pick The Right Options To Trade In Six ...
    Options & Futures

    Pick The Right Options To Trade In Six ...

Trading Center