Pricing Put Options with the Binomial Method
Pricing Put Options with the Binomial Method
This Demonstration applies the binomial method [1] to estimate the value of a put option. Use the controls to set the option's parameters and the time discretization to approximate the American and the European put. The European put can be exercised only at its maturity, while the American put can be exercised at any time up to maturity. The red line represents the early exercise boundary for the American put. Whenever the asset price drops below this boundary, the American put's intrinsic value becomes greater than its holding value and it is optimal for the holder to exercise the option. Random binomial paths show where the asset price is more likely to move.