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Pricing for perpetual American strangle options under stochastic volatility with fast mean reversion

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  • Ha, Mijin
  • Kim, Donghyun
  • Yoon, Ji-Hun
  • Choi, Sun-Yong

Abstract

A perpetual American strangle option refers to an investment strategy combining the features of both call and put options on a single underlying asset, with an infinite time horizon. Investors are known to use this trading strategy when they expect the stock price to fluctuate significantly but cannot predict whether it will rise or fall. In this study, we consider the perpetual American strangle options under a stochastic volatility model and investigate the corrected option values and free boundaries using an asymptotic analysis technique. Further, we examine the pricing accuracy of the approximated formulas for perpetual American strangle options under stochastic volatility by comparing our solutions with the prices that are obtained from Monte Carlo simulations. We also investigate the sensitivities of the option values and free boundaries with respect to several model parameters.

Suggested Citation

  • Ha, Mijin & Kim, Donghyun & Yoon, Ji-Hun & Choi, Sun-Yong, 2025. "Pricing for perpetual American strangle options under stochastic volatility with fast mean reversion," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 227(C), pages 41-57.
    • Handle: RePEc:eee:matcom:v:227:y:2025:i:c:p:41-57
    DOI: 10.1016/j.matcom.2024.07.030
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    References listed on IDEAS

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