Chooser option

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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 , 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[edit]

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 ;.[1]

References[edit]

  1. ^ Yue-Kuen Kwok, Compound options

Bibliography[edit]

  • Yue-Kuen Kwok, Compound options (from Derivatives Week and Encyclopedia of Financial Engineering and Risk Management) [1]