Contract Description 

The payoff of the Atlas option is simply a call (or put) option on the performance of a portfolio at maturity with the best and worst performing shares removed. 

 

Assume that shares are such that Atlas option 1.

Given a strike K, the number of underperforming shares w (worst) and outperforming ones b (best) to be removed, the Atlas option payoff is: 

Atlas option 2

If b < w --> this is more like a best-of option

If w > b --> this is more like a worst-of option 

if w = b --> this is "like a middle of the road" or "average of average" option

 

By removing the outliers, we are removing extreme risk and lowering the premium, while making it more favorable to risk-averse customers. 

Add a comment