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American Strangle Options

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  • Shi Qiu

Abstract

In this paper, we show that the double optimal stopping boundaries for American strangle options with finite horizon can be characterized as the unique pair of solution to a system of two nonlinear integral equations arising from the early exercise premium (EEP) representation. The proof of EEP representation is based on the change-of-variable formula with local time on curves. After comparing the return of the alternative portfolio including an American call and an American put option, we find that it is more preferable for an investor to select American strangle options to hedge an underlying asset with high volatility.

Suggested Citation

  • Shi Qiu, 2020. "American Strangle Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 27(3), pages 228-263, May.
    • Handle: RePEc:taf:apmtfi:v:27:y:2020:i:3:p:228-263
    DOI: 10.1080/1350486X.2020.1825968
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    Cited by:

    1. Joanna Goard & Mohammed AbaOud, 2022. "Analytic Approximation for American Straddle Options," Mathematics, MDPI, vol. 10(9), pages 1-14, April.
    2. Junkee Jeon & Geonwoo Kim, 2022. "Analytic Valuation Formula for American Strangle Option in the Mean-Reversion Environment," Mathematics, MDPI, vol. 10(15), pages 1-19, July.
    3. Tsvetelin S. Zaevski, 2023. "American strangle options with arbitrary strikes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(7), pages 880-903, July.

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