🐍 Binomial tree pricing model 🐍

Problem

A simple and fast model to price an European option with simple assumptions

Solution

Binomial asst pricing model Inputs:

• N ... # of time intervals
• T ... time to maturity
• S_0 ... initial stock price
• sigma ... volatility
• r ... risk-free interest rate
• K ... strike price
• isCall ... is the option a call option (or a Put option if false)

Getting started

Assuming that we are interested in an European call option that matures in 5 years. The pricing is done monthly so the number of time intervals is 5*12 months = 60. The calculated volatility is 10 %, the risk-free rate is 5% and the strike price is 100. To get the implied price:

import numpy as np
binom_tree_option(60, 5, 100, 0.1, 0.05, 100, False)