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Analytic Approximation for American Straddle Options

Author

Listed:
  • Joanna Goard

    (School of Mathematics and Applied Statistics, University of Wollongong, Wollongong, NSW 2522, Australia)

  • Mohammed AbaOud

    (Department of Mathematics and Statistics, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), Riyadh 11564, Saudi Arabia)

Abstract

This paper looks at adapting a recent approach found in the literature for pricing short-term American options to price American straddle options with two free boundaries. We provide a series solution in which explicit formulas for the coefficients are given. Hence, no complicated, recursive systems or nonlinear integral equations need to be solved, and the method efficiently provides fast solutions. We also compare the method with a numerical method and find that it gives very accurate prices not only for the option value, but also for the critical stock prices.

Suggested Citation

  • Joanna Goard & Mohammed AbaOud, 2022. "Analytic Approximation for American Straddle Options," Mathematics, MDPI, vol. 10(9), pages 1-14, April.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:9:p:1401-:d:799643
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    References listed on IDEAS

    as
    1. Chiarella, Carl & Ziogas, Andrew, 2005. "Evaluation of American strangles," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 31-62, January.
    2. Kim, In Joon, 1990. "The Analytic Valuation of American Options," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 547-572.
    3. Shi Qiu, 2020. "American Strangle Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 27(3), pages 228-263, May.
    4. Medvedev, Alexey & Scaillet, Olivier, 2010. "Pricing American options under stochastic volatility and stochastic interest rates," Journal of Financial Economics, Elsevier, vol. 98(1), pages 145-159, October.
    Full references (including those not matched with items on IDEAS)

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