A shout option is a European option where the holder can "shout" to the writer at one time during its life. At the end of the life of the option, the option holder receives either the usual payoff from a European option or the intrinsic value at the time of the shout, whichever is greater.
Suppose the strike price is $50 and the holder of the call shouts when the price of the underlying asset is $60. If the final asset price is less than $60, the holder receives the excess of the asset price over $50.
The shout option is valued by constructing a binomialor trinomial tree for the underlying asset in the usual way. Working back through the tree, if the holder does not shout an be calculated at each node.
The procedure for valuing shout option is therefore similar to the procedure for valuing a regular American option.
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