What is a Call on the Best of N-Assets Option?

A call on the best of n-assets is a special kind of option. An option is a contract. It gives the person who buys it the right to buy or sell something later. Options are a type of thing called derivatives.

A call on the best of n-assets option is an over-the-counter option. This means it is not traded on an exchange. It is a complex option. Complex options are more complicated than regular options.

When you buy this option, it lets you get a payoff. The payoff depends on the difference between two things:

The strike price that was set when you bought the option
The price of the best performing asset in a group of assets

The group of assets is called a portfolio. The portfolio has a certain number of assets in it. This number is called “n”. That’s why it’s a “call on the best of n-assets”.

Example of How It Works

Let’s say there is a call on the best of 3-assets option. The assets in the portfolio are:

Apple stock
Google stock
Microsoft stock

The strike price for the option is set at $100. This means:

If the highest price of the 3 stocks is above $100 when the option expires, the option is “in the money”. The buyer gets a payoff.
If all 3 stocks are below $100, the option is “out of the money”. The buyer doesn’t get a payoff.

Let’s say when the option expires:

Apple stock is at $120
Google stock is at $90
Microsoft stock is at $110

Apple has the best performance of the 3 stocks. Its price of $120 is used.

The payoff is $120 – $100 = $20 per option.

If the buyer has 100 options, they get a payoff of $20 x 100 = $2000.

How the Strike Price Affects the Option

The strike price is very important. It determines whether a buyer gets a payoff or not.

High Strike Price = Less Likely Payoff

If the strike price is set high, the assets have to perform really well for the option to pay off. There is a lower chance of getting a payoff. But if it does happen, the payoff will be bigger.

Low Strike Price = More Likely Payoff

If the strike price is set low, it’s easier for the assets to perform above that level. There is a higher chance of getting a payoff. But the payoffs will be smaller.

Why Investors Use These Options

Investors buy these options for a few reasons:

Bullish on the Assets

An investor might think the assets in the portfolio will go up a lot in price. They are “bullish” on the assets.

Buying the option lets them profit if any of the assets performs really well. They don’t have to predict which specific asset will be the best performer.

Hedge Other Investments

An investor might buy the option as a hedge. This means they use it to protect their other investments.

For example, say they own a lot of other assets similar to the ones in the option. Buying the option helps offset potential losses if those other assets go down in value.

Speculation

Some investors buy these options to speculate. They are basically making a bet on how well the assets will perform.

Speculation with options is very risky. You can lose all the money you pay for the option. But you can also earn high returns if your bet is right.

Pros and Cons of Call on the Best of N-Assets Options

These options have both benefits and drawbacks.

Potential Benefits

You can gain exposure to the upside of many assets with a single option
Payoff is determined by the best performer, so you don’t need all assets to do well
Can help diversify an investment portfolio
Losses are limited to the price paid for the option

Potential Drawbacks

Complex options can be hard to understand and price
Over-the-counter options have lower liquidity than exchange-traded options
You have to pay a premium to buy the option
The assets could perform poorly and the option becomes worthless