Binomial option pricing is a simple but powerful technique that can be used to solve many complex option-pricing problems. In contrast to the Black-Scholes and other complex option-pricing models that require solutions to stochastic differential equations, the binomial option-pricing model (two state option-pricing model) is mathematically simple. It is based on the assumption of no arbitrage.^{1}

So in essence, the binomial option pricing model assumes a perfectly efficient market. Under this assumption, it is able to provide a mathematical valuation of an option at each point in the timeframe specified. The binomial model takes a risk-neutral approach to valuation and assumes that underlying security prices can only either increase or decrease with time until the option expires worthless.^{2}

## References»

## External References»

## CIO Desk Reference»

(Relevant content on this topic in the CIO Toolkit on CIO Index)

So in essence, the binomial option pricing model assumes a perfectly efficient market. Under this assumption, it is able to provide a mathematical valuation of an option at each point in the timeframe specified. The binomial model takes a risk-neutral approach to valuation and assumes that underlying security prices can only either increase or decrease with time until the option expires worthless.

^{1} | BINOMIAL OPTION PRICING |

^{2} | Breaking Down Binomial Option Princing Model |