Before revision:  We assume the option price is a solution to a stationary generalized Black-Scholes equation in which the volatility may depend on the second derivative of the option price itself. We prove existence and uniqueness of a solution to the free boundary problem. We derive a single implicit equation for the free boundary position and the closed form formula for the option price. It is a generalization of the well-known explicit closed form solution derived by Merton for the case of a constant volatility. We also present results of numerical computations of the free boundary position, option price and their dependence on model parameters. is a solution to a stationary generalized Black-Scholes equation in which the volatility  may depend on the second derivative of the option price itself.
After revision:  We assume the option price is a solution to the stationary generalized Black-Scholes equation in which the volatility may depend on the second derivative of the option price itself.