Basic method of calculating the binomial option model

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With binomial option price models, the assumptions are that there are two possible outcomes-hence, the binomial part of the model. With a pricing model, the two outcomes are a move up, or a move down.2 The major advantage of a binomial option pricing model is that they're mathematically simple. Yet these models can become complex in a multi-period model.

In contrast to the Black Sholes Model, which provides a numerical result based on inputs, the binomial model allows for the calculation of the asset and the option for multiple periods along with the range of possible results for each period

The basic method of calculating the binomial option model is to use the same probability each period for success and failure until the option expires. However, a trader can incorporate different probabilities for each period based on new information obtained as time passes.

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Reference no: EM133890023

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