Chooser option explained

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

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} ;.^[1]

References

1. Yue-Kuen Kwok, Compound options

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