Trinomial Option Pricing Model

AAA

DEFINITION of 'Trinomial Option Pricing Model'

An option pricing model incorporating three possible values that an underlying asset can have in one time period. The three possible values the underlying asset can have in a time period may be greater than, the same as, or less than the current value.

INVESTOPEDIA EXPLAINS 'Trinomial Option Pricing Model'

The trinomial option pricing model differs from the binomial option pricing model in one key aspect, which is incorporating another possible value in one periods time. Under the binomial option pricing model, it is assumed that the value of the underlying asset will either be greater than or less than, its current value. The trinomial model, on the other hand, incorporates a third possible value, which incorporates a zero change in value over a time period.

This assumption makes the trinomial model more relevant to real life situations, as it is possible that the value of an underlying asset may not change over a time period, such as a month or a year.

RELATED TERMS
  1. Gamma Pricing Model

    An equation for determining the fair market value of a European-style ...
  2. Option

    A financial derivative that represents a contract sold by one ...
  3. Option Pricing Theory

    Any model- or theory-based approach for calculating the fair ...
  4. Binomial Option Pricing Model

    An options valuation method developed by Cox, et al, in 1979. ...
  5. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
  6. Underlying

    1. In derivatives, the security that must be delivered when a ...
RELATED FAQS
  1. How do I measure option liquidity?

    An option is a financial instrument that gives the holder the right to purchase shares in a company at a certain set price ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Reducing Risk With Options

    If you want to use leverage to your advantage, you must know how many contracts to buy.
  2. Options & Futures

    Option Price-Volatility Relationship: Avoiding Negative Surprises

    Learn about the price-volatility dynamic and its dual effect on option positions.
  3. Options & Futures

    Options and Roth IRAs: Do's and Don'ts

    A breakdown of the do's and don'ts of trading options in a Roth IRA.
  4. Options & Futures

    5 Secrets You Didn't Know About Roth IRAs

    Between its generous tax benefits at retirement and no required minimum distributions, a Roth IRA is well worth considering if you're eligible to have one.
  5. Forex Strategies

    The 10 Riskiest Investments

    Investors seeking high returns must also be prepared for high risk. Here are ten of the riskiest investments available.
  6. Options & Futures

    Trade Covered Calls On High Dividend Paying Stocks

    We explain the risks, rewards, timing, and profit and loss considerations for covered calls with dividend stocks.
  7. Options & Futures

    Was Buffet Right about Derivatives as WMDs?

    Why Warren Buffet described derivatives as weapons of mass destruction, and when can they be helpful or harmful?
  8. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  9. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  10. Options & Futures

    Top Brokers Offering Tools For Covered Calls

    Here are the brokers that offer the best tools for investors and traders to write covered calls and covered puts.

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center