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 $t_1$ , where the buyer has to make the decision described above. Finally, at the expiration time $t_2$ the option expires. If the buyer has chosen that it should be a call option, the payout is $\max(S-K,0)$ . For the choice of a put option, the payout is $\max(K-S,0)$ . Here $K$ is the strike price of the option and $S$ is the stock price at expiry.

Replication

For stocks without dividend, the chooser option can be replicated using one call option with strike price $K$ and expiration time $t_2$ , and one put option with strike price $K e^{-r(t_2-t_1)}$ and expiration time $t_1$ ;.Yue-Kuen Kwok, Compound options

References

Bibliography

Yue-Kuen Kwok, Compound options (from Derivatives Week and Encyclopedia of Financial Engineering and Risk Management) [http://www.math.ust.hk/~maykwok/piblications/Articles/comp%20option.pdf]

Category:Options (finance)