
Chooser option
Encyclopedia
A chooser option is a special type of option contract
. It gives the purchaser a fixed period of time to decide whether the derivative will be a European call or put option.
In more detail, a chooser option has a specified decision time
, where the buyer has to make the decision described above. Finally, at the expiration time
the option expires. If the buyer has chosen that it should be a call option, the payout is
. For the choice of a put option, the payout is
. Here
is the strike price of the option and
is the stock price at expiry.
and expiration time
, and one put option with strike price
and expiration time
;.
Option contract
An option contract is defined as "a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer." Restatement of Contracts § 25 ....
. It gives the purchaser a fixed period of time to decide whether the derivative will be a European call or put option.
In more detail, a chooser option has a specified decision time






Replication
For stocks without dividend the chooser option can be replicated using one call option with strike price


