Analytic Approximation for American Straddle Options

Joanna Goard and Mohammed AbaOud
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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

Mathematics, 2022, vol. 10, issue 9, 1-14

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.

Keywords: American straddle options; options valuation; analytical approximations; critical stock prices; free boundary problems (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
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