Analytic approximations for pricing perpetual American strangle options under constant elasticity of variance model with stochastic volatility

초록

Generally, a perpetual American strangle option is an investment strategy integrating the characteristics of call and put options under an underlying asset with an infinite time horizon. Investors commonly use this trading strategy as they anticipate the underlying asset to fluctuate considerably but are uncertain about an increase or decrease. In this study, we consider the perpetual American strangle options under the Stochastic Volatility Constant Elasticity of Variance (SVCEV) model and examine the approximated option prices and free boundary values using an asymptotic analysis. Moreover, we verify the pricing accuracy of the approximated solutions for perpetual American strangle options under SVCEV by comparing our solutions with the prices derived from Monte Carlo simulations. Finally, we analyze the price sensitivities of the options and free boundaries in terms of several model parameters. Our findings emphasize that the influence of the SV factor on the option price or the optimal exercise boundary is significant for the effective volatility and the elasticity parameter.

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