JSFiddle - React, Tailwind, and code Playground

HTML

<select data-bind="options: items, optionsAfterRender: setOptionHTML"></select>

JavaScript

function ViewModel() {
    this.items = ko.observableArray([
        '<strong>Foo</strong>',
        '<H1>Bar</H1> <small>TM</small>'
    ])
    
    this.setOptionHTML = function(option, html) {
        ko.applyBindingsToNode(option, {
            html: html
        })
    }
}

ko.applyBindings(new ViewModel())