What is a 'Binomial Tree'
A binomial tree is a graphical representation of possible intrinsic values that an option may take at different nodes or time periods. The value of the option depends on the underlying stock or bond, and the value of the option at any node depends on the probability that the price of the underlying asset will either decrease or increase at any given node.
BREAKING DOWN 'Binomial Tree'
A binomial tree is a useful tool when pricing American options and embedded options. Its simplicity is its advantage and disadvantage at the same time. The tree is easy to model out mechanically, but the problem lies in the possible values the underlying asset can take in one period time. In a binomial tree model, the underlying asset can only be worth exactly one of two possible values, which is not realistic, as assets can be worth any number of values within any given range.
Example of a Binomial Tree
There are a few major assumptions in a binomial option pricing model: 1) only two possible prices, one up and one down; 2) the underlying asset pays no dividends; 3) interest rate is constant; and, 4) no taxes and transaction costs.
Assume a stock price of $100, option strike price of $100, oneyear expiration date, and interest rate (r) of 5%. At the end of the year there is a 50% probability the stock will rise to $125 and 50% probability it will drop to to $90. If the stock rises to $125 the value of the option will be $25 ($125 stock price minus $100 strike price) and if it drops to $90 the option will be worthless. The option value will be:
Option value = [(probability of rise*up value) + (probability of drop*down value)] / (1+r) = [(0.50*$25) + (0.50*$0)] / (1+0.05) = $11.90

Binomial Distribution
The binomial distribution is a probability distribution that ... 
Time Value
The portion of an option's premium that is attributable to the ... 
Boundary Conditions
Boundary conditions are the maximum and minimum values used to ... 
Put Option
A put options gives the owner the right to sell a specified amount ... 
At The Money
At the money is a situation where an option's strike price is ... 
Sell to Close
Sell to close is an options trading order that is used to exit ...

Trading
Breaking Down The Binomial Model To Value An Option
Find out how to carve your way into this valuation model niche. 
Trading
Basics Of The Binomial Distribution
Despite the fancysounding name, you already understand the Binomial Distribution, and you can use it to make money. Ready? Read on. 
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 Anatomy of Options
Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio. 
Trading
Understanding Option Pricing
Before venturing into the world of trading options, investors should have a good understanding of the factors determining the value of an option. 
Trading
The Basics Of Option Price
Learn how options are priced, what causes changes in the price, and pitfalls to avoid when trading options. 
Trading
Dollar Tree Forces WalMart to Think HighEnd (DLTR, WMT)
WalMart shouldn't compete with its lowend competitor Dollar Tree. Instead, the company should compete with its higher margin competitors. 
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. 
Trading
Understanding The Options Premium
The price of an option, otherwise known as the premium, has two basic components: intrinsic value and time value.

What occurs when a security meets its strike price?
Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >> 
When is a call option considered to be "in the money"?
Learn about call options, their intrinsic values and why a call option is in the money when the underlying stock price is ... Read Answer >> 
When is a put option considered to be 'in the money?'
Learn about put options, how these financial derivatives work, and when put options are considered to be in the money related ... Read Answer >>