A chooser option (or preference option) is a path dependent option for which the purchaser pays an up-front premium and has the choice of having the derivative be either a European put or a European call on a given underlier. She has a fixed period of time to make that choice. There is usually a single strike and expiration date that apply to both the put and call alternatives. Such structures are called simple choosers. Structures in which one or both the strike and expiration differ for the two alternatives are called complex chooser options.
A typical structure might have the time to choose equal to half the entire time to expiration of the instrument. The chooser feature becomes increasingly valuable with longer choice periods. In the limiting case, as the chooser period approaches the entire time to expiration, the instrument becomes equivalent to a straddle. Not surprisingly, choosers are purchased as inexpensive alternatives to straddles—they are volatility plays.
The first chooser option wa structured by Bankers Trust in 1990. Today, there is little activity in chooser options.