American Strangle Options

Shi Qiu

Applied Mathematical Finance, 2020, vol. 27, issue 3, 228-263

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.

Date: 2020
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DOI: 10.1080/1350486X.2020.1825968

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