The CoxRossRubinstein binomial option pricing model (CRR model) is a variation of the original BlackScholes option pricing model. It was first proposed in 1979 by financial economists/engineers John Carrington Cox, Stephen Ross and Mark Edward Rubinstein. The model is popular because it considers the underlying instrument over a period of time, instead of just at one point in time. It does this by using a latticebased model, which takes into account expected changes in various parameters over an option's life, thereby producing a more accurate estimate of option prices than created by models that consider only one point in time. Because of this, the CRR model is especially useful for analyzing American style options, which can be exercised at any time up to expiration (European style options can only be exercised upon expiration). And, unlike the original BlackScholes option pricing model, the CRR model has the ability to take into account the effect of dividends paid out by a stock during the life of an option.
CoxRossRubinstein Method
The CRR model uses a riskneutral valuation method. Its underlying principal affirms that when determining option prices, it can be assumed that the world is risk neutral and that all individuals (and investors) are indifferent to risk. In a risk neutral environment, expected returns are equal to the riskfree rate of interest. Like the BlackScholes model, the CRR model makes certain assumptions, including:
 No possibility of arbitrage; a perfectly efficient market
 At each time node, the underlying price can only take an up or a down move and never both simultaneously
The CRR model employs and iterative structure that allows for the specification of nodes (points in time) between the current date and the option's expiration date. The model is able to provide a mathematical valuation of the option at each specified time, creating a "binomial tree"  a graphical representation of possible values at different nodes.
The CRR model is a twostate (or twostep) model in that it assumes the underlying price can only either increase (up) or decrease (down) with time until expiration. Valuation begins at each of the final nodes (at expiration) and iterations are performed backwards through the binomial tree up to the first node (date of valuation). In very basic terms, the model involves three steps:
 The creation of the binomial price tree
 Option value calculated at each final node
 Option value calculated at each preceding node
While the math behind the CoxRossRubinstein model is considered less complicated than the BlackScholes model, you can use online calculators and trading platformbased analysis tools to determine option pricing values. Figure 6 shows an example of the CoxRossRubinstein model applied to an Americanstyle options contract. The calculator produces both put and call values based on variables the user inputs.
Figure 6: The CoxRossRubinstein model applied to an Americanstyle options contract, using the Options Industry Council's online pricing calculator. 
Options Pricing: Put/Call Parity

Trading
Breaking Down The Binomial Model To Value An Option
Find out how to carve your way into this valuation model niche. 
Investing
Using Decision Trees In Finance
These decisionmaking tools play an integral role in corporate finance and economic forecasting. 
Trading
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. ... 
Trading
The Anatomy of Options
Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio. 
Trading
How To Build Valuation Models Like BlackScholes (BS)?
Want to build a model like BlackScholes? Here are the tips and guidelines for developing a framework with the example of the BlackScholes model. 
Investing
Understanding the BlackScholes Model
The BlackScholes model is a mathematical model of a financial market. From it, the BlackScholes formula was derived. The introduction of the formula in 1973 by three economists led to rapid ... 
Investing
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 ... 
Trading
The "True" Cost Of Stock Options
Perhaps the real cost of employee stock options is already accounted for in the expense of buyback programs.