The American put and European options near expiry, under Lévy processes

We derive explicit formulas for time decay, θ, for the European call and put options at expiry, and use them to calculate analytical approximations to the price of the American put and early exercise boundary near expiry. We show that for many families of non-Gaussian processes used in empirical studies of financial markets, the early exercise boundary for the American put without dividends is separated from the strike price by a non-vanishing margin on the interval [0, T ). As the riskless rate vanishes and the drift decreases accordingly so that the stock remains a martingale, the optimal exercise price goes to zero uniformly over the interval [0, T ). The implications for parameters’ fitting are discussed.