Time decay comparison for option straddle in case of insufficient liquidity or transaction costs

Author(s):  M.M. Dyshaev, candidate of Sciences, no, Chelyabinsk State University, Chelyabinsk, Russia, MikhaiLDyshaev@gmail.com

V.E. Fedorov, Dr., Chelyabinsk State University, Chelyabinsk, Russia

Issue:  Volume 51, № 3

Rubric:  Physics. Mathematical modeling

Annotation:  The article analyzes time decay for the option strategy «straddle». The simulation is carried out on the example of two models: the model of R.K. Sircar and G. Papanicolaou (1998) and the model of M. Janclacka and D.Sevcovic (2005). The first model takes into account, the feedback effects of the operations of large traders, the second model takes into account, the transaction costs. The results are presented in the form of graphs, showing the difference in prices of and time decay for the nonlinear models under study from the classical linear model of Black-Scholes, when using the strategy straddle.

Keywords:  transaction costs; nonlinear Black — Scholes equations; option pricing; straddle

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