Infinance, achooser option is a special type ofoption contract. It gives the purchaser a fixed period to decide whether thederivative will be aEuropeancall orput option.

In more detail, a chooser option has a specified decision time${\displaystyle t_1}$, where thebuyer has to make the decision described above. Finally, at theexpiration time${\displaystyle t_2}$ the option expires. If the buyer has chosen that it should be acall option, the payout is${\displaystyle max(S-K,0)}$. For the choice of aput option, the payout is${\displaystyle max(K-S,0)}$. Here${\displaystyle K}$ is thestrike price of the option and${\displaystyle S}$ is thestock price at expiry.

Forstocks withoutdividend, the chooser option can be replicated using onecall option withstrike price${\displaystyle K}$ and expiration time${\displaystyle t_2}$, and oneput option withstrike price${\displaystyle K{e}^{-r(t_2-t_1)}}$ and expiration time${\displaystyle t_1}$;.^[1]

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

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