What is the 'Binomial Option Pricing Model'
The binomial option pricing model is an options valuation method developed by Cox, et al, in 1979. The binomial option pricing model uses an iterative procedure, allowing for the specification of nodes, or points in time, during the time span between the valuation date and the option's expiration date.
The model reduces possibilities of price changes, removes the possibility for arbitrage, assumes a perfectly efficient market, and shortens the duration of the option. Under these simplifications, it is able to provide a mathematical valuation of the option at each point in time specified.
BREAKING DOWN 'Binomial Option Pricing Model'
The binomial model takes a riskneutral approach to valuation. It assumes that underlying security prices can only either increase or decrease with time until the option expires worthless. A simplified example of a binomial tree might look something like this:
Â
Â
Due to its simple and iterative structure, the model presents certain unique advantages. For example, since it provides a stream of valuations for a derivative for each node in a span of time, it is useful for valuing derivatives such as American options which allow the owner to exercise the option at any point in time until expiration (unlike European options which are exercisable only at expiration). The model is also somewhat simple mathematically when compared to counterparts such as the BlackScholes model, and is therefore relatively easy to build and implement with a computer spreadsheet.

LatticeBased Model
An option pricing model that involves the construction of a binomial ... 
Down Transition Probability
The probability that an asset's value will decline in one period's ... 
American Option
An option that can be exercised anytime during its life. American ... 
Expiration Time
A specified time, after which the options contract is no longer ... 
BjerksundStensland Model
A closedform option pricing model used to calculate the price ... 
Black's Model
A variation of the popular BlackScholes options pricing model ...

Options & Futures
Options Pricing: CoxRubenstein Binomial Option Pricing Model
The CoxRubenstein (or CoxRossRubenstein) binomial option pricing model is a variation of the original BlackScholes option pricing model. It was first proposed in 1979 by financial economists/engineers ... 
Options & Futures
Using Decision Trees In Finance
These decisionmaking tools play an integral role in corporate finance and economic forecasting. 
Fundamental Analysis
Examples To Understand The Binomial Option Pricing Model
Binomial option pricing model, based on risk neutral valuation, offers a unique alternative to BlackScholes. Here are detailed examples with calculations using Binomial model and explanation ... 
Options & Futures
The Anatomy of Options
Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio. 
Options & Futures
Options Pricing: Modeling
Option traders utilize various option price models to attempt to set a current theoretical value. Models use certain fixed knowns in the present – factors such as underlying price, strike ... 
Options & Futures
Exploring European Options
The ability to exercise only on the expiration date is what sets these options apart. 
Options & Futures
Circumvent Limitations of BlackScholes Model
Mathematical or quantitative modelbased trading continues to gain momentum, despite major failures like the financial crisis of 200809, which was attributed to the flawed use of trading models. ... 
Options & Futures
Getting Acquainted With Options Trading
Learn more about stock options, including some basic terminology and the source of profits. 
Options & Futures
Options Pricing: A Review Of Basic Terms
The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options  An option that can be at any point during the life of the contract. ... 
Options & Futures
Give Yourself More Options With Weekly and Quarterly Options
Weekly and quarterly options were introduced to give a greater choice of option expirations to investors, and enable them to trade more efficiently.

What is the average return on equity for a company in the electronics sector?
Learn about the BlackScholes option pricing model and the binomial options model, and understand the advantages of the binomial ... Read Answer >> 
How is implied volatility for options impacted by a bearish market?
Learn why implied volatility for option prices increases during bear markets, and learn about the different models for pricing ... Read Answer >> 
Can an option be exercised on the expiration date?
The use of options has increased dramatically over the years as a way to profit from or hedge against the volatile movements ... Read Answer >> 
How do I change my strike price once the trade has been placed already?
Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >> 
How are call options priced?
Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >> 
Do you have to be an expert investor to trade put options?
Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined ... Read Answer >>