- Useful for valuing American options which allow the owner to exercise the option at any point in time until expiration.
- The model is simple mathematically when compared to the Black-Scholes model, and is relatively easy to build and implement with a computer spreadsheet.
- In this model it is possible to check at every point in an option’s life for the possibility of early exercise.
- The Binomial options pricing model approach is widely used as it is able to handle a variety of conditions for which other models cannot easily be applied. This is largely because the BOPM models the underlying instrument over time – as opposed to at a particular point.
- This model is also used to value Bermudan options which can be exercised at various points.
- This model is considered to be more accurate, particularly for longer-dated options, and options on securities with dividend payments.