Option Pricing: Channels, Target Zones and Sideways Markets

TL;DR

This paper develops closed-form option pricing formulas for sideways markets with channels and target zones, applicable to various assets including FX and digital currencies, addressing scenarios with attainable and unattainable boundaries.

Contribution

It introduces new closed-form formulas for option pricing in sideways markets and target zones, extending applicability to FX rates and digital currencies.

Findings

Provides formulas for attainable and unattainable boundaries.

Applicable to FX rates in target zones without interest rate pegging.

Extends option pricing models to sideways market scenarios.

Abstract

After a market downturn, especially in an uncertain economic environment such as the current state, there can be a relatively long period with a sideways market, where indexes, stocks, etc., move in channels with support and resistance levels. We discuss option pricing in such scenarios, in both cases of unattainable as well as attainable boundaries, and obtain closed-form option pricing formulas. Our results also apply to FX rates in target zones without interest rate pegging (USD/HKD, digital currencies, etc.).