Basket options are financial instruments whose values are pegged to the performance of a specific basket of stocks. While most options are valued based on an individual stock or financial instrument, basket options are linked to a group of shares. If these underlying stocks rise, the value of the option goes up—it’s like owning the shares without actually doing so. Indeed, the banks were legal owners of shares in the basket, but, for all intents and purposes, they were Medallion’s property. The fund’s computers told the banks which stocks to place in the basket and how they should be traded.
