Binomial Option Pricing Model

The Binomial Option Pricing Model is a method used to estimate the value of an option by imagining the possible future movements of the underlying asset's price in small steps. At each step, the price can go up or down, creating a "binomial" (two-way) tree of outcomes. By considering all these possibilities and working backward, the model calculates a fair price for the option that accounts for potential risks and returns. This approach helps investors understand how the value of an option may change as market conditions fluctuate over time.