Skip to main content

Why Is the Binomial Option Pricing Model Suitable for American Options?

The binomial model is suitable because it is a discrete-time model that allows for the possibility of exercise at every single time step leading up to expiration. At each node, the model compares the value of exercising the option immediately with the value of holding it, thus correctly valuing the early exercise feature inherent in American options.

Under What Circumstances Would It Be Optimal to Exercise an American Option Early?
Why Is the Binomial Option Pricing Model Often Used for American Options Instead of Black-Scholes?
How Does the Early Exercise Feature Complicate the Pricing of American Options?
How Does Early Exercise Affect the Pricing Model for American Options?