Ranking Worst-of Put Baskets by Likely Premium

Summary

The document asks how to identify, from a stock universe, the three names likely to produce the highest premium for a worst-of put. Its payoff depends on the weakest normalized asset outcome at maturity, so the question concerns both individual price behavior and how assets interact within a basket. The author seeks a quick heuristic for ranking combinations rather than a precise valuation, and mentions access to market data and prior attempts using copied Monte Carlo scripts.

No ranking method or calculation is supplied in the material. Instead, it frames the practical challenge of estimating worst-of exposure for yield-enhanced structured products and notes that rigorous valuation can be complex. A useful analysis would need to account for inputs such as volatility, dependence among assets, strikes, and maturity, but the document itself does not specify a model, provide empirical evidence, or establish that any particular heuristic works. It is therefore a question about basket option selection rather than a demonstrated pricing recipe.

Key ideas

• A worst-of put payoff depends on the weakest normalized asset value at maturity.
• The question seeks to rank three-asset baskets by likely premium rather than calculate exact prices.
• Basket composition can make the dependence between assets relevant to the payoff and valuation.
• The document poses the problem but does not provide a heuristic, model, or evidence for a ranking method.

Tags

# Heuristic for "optimising" assets in a min/worst of basket option


# Heuristic for "optimising" assets in a min/worst of basket option












Given a universe of X stocks, I'm trying to find what combination of 3 would result in the highest premium for a 'Worst Of Put'

$$ max(1-min(\frac {S(T)_1} {K_1},...,\frac {S(T)_i} {K_i}),0) $$

I guess I don't really need full optimisation, as I'm not looking for accurate premiums, I just was wondering if there is any heuristic or quick calcs I could use to infer which combinations would likely rank highest. I have access to a Bloomberg Terminal.

I've copied some people's python scripts and monte carlo's to try and do this, but I hate the feeling of not really the why/how of certain sections of the code.

Conscious that the answer may be "this is complex for a reason and can't be simplified" but I thought I should still ask. Regardless thanks for the help.

Some context: I work in exotic / structured product sales at a distributor / wholesaler. In my team I'm treated as the 'quant' but comparatively to the traders/structures at the banks I'm very behind. While I'm striving to be able to solve this problem myself, it comes up very frequently, and I'm not quite at the stage.

As I'm sure many structurers/traders in here would understand - investors in yield enhanced structured products love to increase their premium by selling a 'worst of put option' so I'm trying to find a way to help them do that. I know there's many groups out there offering these tools, but we don't have a lot of budget.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.