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
, 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.Replication
For stocks without dividend the chooser option can be replicated using one call option with strike price and expiration time , and one put option with strike price and expiration time ;.