All termsOption Pricing and ValueWorth knowing
Binomial Option Pricing Model
The binomial option pricing model estimates option value by modeling possible movements in the underlying asset over a series of time steps.
Why it matters to you
Unlike simpler models designed around European style exercise, binomial models can accommodate features such as possible early exercise, making them useful for analyzing certain American style options. A trader does not need to calculate a binomial tree manually, but should understand why different option products may require different pricing approaches.