In this article, we consider the small-time asymptotics of options on a Leveraged Exchange-Traded Fund (LETF) when the underlying Exchange Traded Fund (ETF) exhibits both local volatility and jumps of either finite or infinite activity. Our main results are closed-form expressions for the leading order terms of off-the-money European call and put LETF option prices, near expiration, with explicit error bounds. We show that the price of an out-of-the-money European call on a LETF with positive (negative) leverage is asymptotically equivalent, in short-time, to the price of an out-of-the-money European call (put) on the underlying ETF, but with modified spot and strike prices. Similar relationships hold for other off-the-money European options. In particular, our results suggest a method to hedge off-the-money LETF options near expiration using options on the underlying ETF. Finally, a second order expansion for the corresponding implied volatilities is also derived and illustrated numerically.
In this article, we consider the small-time asymptotics of options on a Leveraged Exchange-Traded Fund (LETF) when the underlying Exchange Traded Fund (ETF) exhibits both local volatility and jumps of either finite or infinite activity. Our main results are closed-form expressions for the leading order terms of off-the-money European call and put LETF option prices, near expiration, with explicit error bounds. We show that the price of an out-of-the-money European call on a LETF with positive (negative) leverage is asymptotically equivalent, in short-time, to the price of an out-of-the-money European call (put) on the underlying ETF, but with modified spot and strike prices. Similar relationships hold for other off-the-money European options. In particular, our results suggest a method to hedge off-the-money LETF options near expiration using options on the underlying ETF. Finally, a second order expansion for the corresponding implied volatility is also derived and illustrated numerically.
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Leveraged Exchange-Traded Fund
Leveraged Exchange-Traded Fund
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volatilities
volatility