What is the Binomial Option Pricing Model?

In this comprehensive video, we delve into the intricacies of the Binomial Option Pricing Model, an essential tool for traders and financial analysts to value options. Starting with an introduction to the model, we guide you through constructing a riskless portfolio, calculating the number of long shares, and estimating portfolio value. Learn how to calculate the implied value of a call option, determine probabilities of market moves, and finally discuss the Binomial Option Pricing Model applications to real-world scenarios. Whether you're a beginner or an expert in finance, this video serves as a complete walkthrough for understanding and utilizing the Binomial Option Pricing Model effectively.

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Chapters:
0:00 - Introduction to the Binomial Option Pricing Model
2:09 - Constructing a Riskless Portfolio
4:10 - Calculating the # of Long Shares in Portfolio
6:35 - Calculate Portfolio Value in 1 Year
8:13 - Calculate the Implied Value of a Call Option
9:17 - Calculate Probabilities of Up & Down Moves
11:40 - Value Call Option Using Binomial Option Pricing Model
12:24 - Value Put Option Using Binomial Option Pricing Model
14:02 - The Binomial Option Pricing Model in the Real World

*Disclosure: This is not financial advice and should not be taken as such. The information contained in this video is an opinion. Some of the information could be wrong. This channel is owned and operated by Portfolio Constructs LLC. Some of the links above are affiliate links, meaning, at no additional cost to you, I will earn a commission if you click through and make a purchase.

[MrMenok]

You have been my primary educator for my entire finance curriculum, keep up the amazing work!!!

[gabewhitten]

Thanks Ryan, this has helped me greatly with estimating the future value of my portfolio hedges.

[minasalahshoury]

Thank you so much for making it so easy to understand🙏💐

[ErnestMarji]

I have been following you and I like your teaching style. It has helped me a lot. Keep it up!

[maxmustermann]

Nicely explained certainly better than in the lecture I really like your channel sir

[bngitnator]

Thx bryan. Have my binomial option pricing in my ca final (india) strategic financial management paper. This was definitely very helpful for me to understand.

[CharlesAsare-njqu]

Clear understanding i am in UCC level 400, good

[lyntonbr]

Thanks for the explanation... You showed the calculation taking 1 year period, Do we use the same formulas considering 1 day period? Its the difference only in the value of the down and up factors?

[dattatreyasharma]

May u please prepare a video on how to calculate u and d in real-world scenario from data

[LifeinEurope]

thanks so much! Do you maybe have videos on both American and European options with Dividend and non dividend paying stocks?

[victoricus]

Ryan, thank you for this wonderful video! I would like to clarify the following: How would one estimate 'u' and 'd' in real life? I understand it's outside of the scope of the video, but maybe you could point me in the right direction (CFA learning statement or something more intuitive). What software one would use to estimate the value of options using binomial models - python based software maybe?

[milemedia]

Thanks for the video. Is there a reference text

[mariamanos]

To understand this you must see it from the point of view of the call option seller. Otherwise does not make sense why when the call option is excercised you lose money (48-38) in the upper, stock goes up scenario.
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[learning_with_irving]

How do you have a CFA and no gray hair? Lol keep it up, bud!!

[victoricus]

Also, why wouldn't anyone be able to build a riskless portfolio, by using short PUT options? I dont quite get the intuition behind it...although i kinda get that one somehow manages market exposure by selling 'buy options'. Does it have anything to do with the concepts of arbitrage and replication (which I too do not really understand)?

[datajake]

A little lost on your computation of c1- … I get that the c1+ case (you pocket strikePrice- matketPrice). But in c1- why isn’t v1- 0? The option holder wouldn’t exercise if it was out of the money, so worthless. No?