Finance:Chooser option

In finance, a chooser option is a special type of option contract. It gives the purchaser a fixed period to decide whether the derivative will be a European call or put option. In more detail, a chooser option has a specified decision time [math]\displaystyle{ t_1 }[/math], where the buyer has to make the decision described above. Finally, at the expiration time [math]\displaystyle{ t_2 }[/math] the option expires. If the buyer has chosen that it should be a call option, the payout is [math]\displaystyle{ \max(S-K,0) }[/math]. For the choice of a put option, the payout is [math]\displaystyle{ \max(K-S,0) }[/math]. Here [math]\displaystyle{ K }[/math] is the strike price of the option and [math]\displaystyle{ S }[/math] is the stock price at expiry.

Replication

For stocks without dividend, the chooser option can be replicated using one call option with strike price [math]\displaystyle{ K }[/math] and expiration time [math]\displaystyle{ t_2 }[/math], and one put option with strike price [math]\displaystyle{ K e^{-r(t_2-t_1)} }[/math] and expiration time [math]\displaystyle{ t_1 }[/math];.

Bibliography

• Yue-Kuen Kwok, Compound options (from Derivatives Week and Encyclopedia of Financial Engineering and Risk Management) [1]