What Is a Chooser Option?

A chooser option is an option contract that allows the holder to decide whether it is to be a call or put before the expiration date. Chooser options usually have the same 澳洲幸运5官方开奖结果体彩网:strike price and expiration date regardless of what decision the holder makes. Because the option may benefit from upside or downside movement, chooser options provide investors with a great deal of flexibility and thus may cost more than comparable 澳洲幸运5官方开奖结果体彩网:vanilla options.

Understanding Chooser Options

Chooser options are a type of 澳洲幸运5官方开奖结果体彩网:exotic option. These options are generally traded on alternative exchanges without the support of regulatory regimes common to vanilla options. As such, they can have higher risks of 澳洲幸运5官方开奖结果体彩网:counterparty default.

Chooser options offer the holder the flexibility to choose between a put or a call. These options are typically constructed as a 澳洲幸运5官方开奖结果体彩网:European option with a single expiration date and strike price. The holder has the right to exercise the option only on the 澳洲幸运5官方开奖结果体彩网:expiration date.

A chooser option can be a very attractive instrument when an underlying security sees an increase in volatility, or when a trad🦹er is unsure whether the underlying will rise or fall in value. For example, an investor may select a chooser option on a biotech company awaiting the Food and Drug Administration’s approval (or non-approval) of its drug.

That said, chooser options tend to be more expensive than European vanilla options, and high 澳洲幸运5官方开奖结果体彩网:implied volatility will increase the premium paid for the chooser option. Therefore, a trader must weigh the cost of the option against their potential payoff, just like with any optio𒈔n.

Special Considerations

Payoffs for chooser options follow the same basic methodology used to analyze a vanilla call or put option. The difference is that the investor has the option to choose the specified payoff they desire at expiraꦺtion based on whether the call or put position is more profitable.

• If an underlying security trades above its strike price at expiration, then the call option is exercised. If the holder chooses to exercise the option as a call option, then the payoff is the underlying price minus the strike price. If there is a premium, this is subtracted from the result. In this scenario, the holder benefits from buying the security at a lower price than it is selling for in the market.
• If a security trades below its strike price at expiration, then the put option is exercised. If the holder chooses to exercise their option as a put option then the payoff is the strike price less the underlying price. If there is a premium, this is subtracted from the result. In this scenario, the holder benefits from selling the underlying security at a higher price than it is trading for in the open market.

It is important to n🌟ote, however, that the typical decision time to choose is midway between the transaction date and the expiration date. The closer the decision date is to the expiration date, the m💜ore expensive the option price is.

Example of a Chooser Option on a Stock

Assume a trader wants to have an option position for the updating Bank of America Corporation (BAC) 澳洲幸运5官方开奖结果体彩网:earnings release. They believe the stock will make a big move𒁃, but are unsure about the direction.▨

The earnings release is in one month, so the trader decides to buy a chooser option that will expire about three weeks after the release. They believe this should provide enough time for the stock to make a significant move if it is going to make one, and fully digest the release. Therefore, the option they choose will expire in seven to eight weeks. The chooser option allows them to exercise the option as a call if the price of BAC rises, or as a put if the price🐬 falls.

At the time of the chooser option purchase, BAC trades at $28. The trader chooses an 澳洲幸运5官方开奖结果体彩网:at-the-money strike price of $28 and pays a premium of $2 or $200 for one contract ($2 x 100 shares). The buyer can't exercise the option before expiry since it is a E🐷uropean option. At expiry, the trader will determine if they will exercise the option as a call or put.﷽

Assume the price of BAC at the time🌳 of expiry is $31. This is higher than the strike price of $28, so the trader will exercise the option as a call. Their profit is $1 ($31 - $28 - $2) or $100:

• If BAC trades between $28 and $29.99, the trader will still choose to exercise the option as a call, but will still lose since the profit is not enough to offset their $2 cost as $30 is the call's 澳洲幸运5官方开奖结果体彩网:breakeven point.
• If the price is below $28, the trader will exercise the option as a put. In this case, $26 is the breakeven point ($28 - $2). If the underlying trades between $26.01 and $28, the trader will lose money since the price didn't fall enough to offset the cost of the option.
• If the price of BAC falls below $26, say to $24, the trader will make money on the put. Their profit is $2 ($28 - $24 - $2) or $200.

The Bottom Line

Options come in different shapes and sizes. A call option gives the investor the right to buy the asset, while a put option gives them the right to sell the underlying asset. But, there's another type: the chooser option. With this option, the contract holder can decide whether it's a call or a put after they buy the option. While it may provide the investor with more flexibility, it is usually a more expensive venture than a vanilla option.

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