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On Trading American Put Options with Interactive Volatility

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  • Sigurd Assing
  • Yufan Zhao

Abstract

We introduce a simple stochastic volatility model, whose novelty consists in taking into account hitting times of the asset price, and study the optimal stopping problem corresponding to a put option whose time horizon (after the asset price hits a certain level) is exponentially distributed. We obtain explicit optimal stopping rules in various cases one of which is interestingly complex because of an unexpected disconnected continuation region. Finally, we discuss in detail how these stopping rules could be used for trading an American put when the trader expects a market drop in the near future.

Suggested Citation

  • Sigurd Assing & Yufan Zhao, 2014. "On Trading American Put Options with Interactive Volatility," Papers 1411.6938, arXiv.org, revised Mar 2017.
    • Handle: RePEc:arx:papers:1411.6938
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    References listed on IDEAS

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    1. John Buffington & Robert J. Elliott, 2002. "American Options With Regime Switching," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(05), pages 497-514.
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