Explanation:
A simple chooser option gives the holder the right, at the choose date, to decide whether the position becomes a call or a put with the same strike and maturity.
That makes it most similar to a long straddle, because a straddle also benefits from a large move in either direction.
However, the chooser is generally cheaper than a long straddle because you do not hold both options from the outset; you delay the choice until the choose date.
So the correct answer is A: Long straddle but chooser is cheaper.
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Consider a chooser option where the underlying is Microsoft's stock (ticker: MSFT). The options underlying the chooser are both European and have the same strike price (i.e., simple chooser) of $35.00. The choose date is six months ( years) and the maturity of the options is one year ( year). The risk-free rate is 3.0% per annum with continuous compounding. A long position in this chooser option is most similar to which of the following trading strategies, and how does the initial cost compare to the similar strategy?
A
Long straddle but chooser is cheaper
B
Short straddle but chooser is more expensive
C
Long calendar spread with similar cost
D
Long Butterfly spread but chooser cheaper