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
m
a
x
(
S
−
K
,
0
)
. For the choice of a put option, the payout is
m
a
x
(
K
−
S
,
0
)
. Here
K
is the strike price of the option and
S
is the stock price at expiry.
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
;.
