Option Price Tree - Binomial Option Pricing Calculator

The page explains the OptTree sheet of the Binomial Option Pricing Calculator, where you can view the option price binomial tree. Macroption Get a Calculator Sign In Tutorials Calculators Services About Contact Tutorials Calculators Services About Contact Sign In Get a Calculator All»ExcelCalculators»BinomialOptionPricingCalculatorOptionPriceTreeYouareinExcelCalculators»BinomialOptionPricingCalculatorBinomialOptionPricingCalculatorUserGuideEnteringInputsStockandETFOptionsDividendsIndexOptionsCurrencyOptionsFuturesOptionsModelsandNumberofStepsCox-Ross-RubinsteinModelJarrow-RuddModelLeisen-ReimerModelUnderlyingPriceTreeOptionPriceTreeOptionGreeksWorkingwiththeChartScenarioAnalysisPreferencesBinomialOptionPricingCalculatorDownload MoreinExcelCalculators OptionStrategyPayoffCalculatorOptionStrategySimulatorOptionPortfolioManagerPriceProbabilityCalculatorBlack-ScholesCalculatorBinomialOptionPricingCalculatorHistoricalVolatilityCalculatorImpliedVolatilityCalculatorAverageTrueRange(ATR)CalculatorRelativeStrengthIndex(RSI)CalculatorFuturesPriceCalculatorDescriptiveStatisticsCalculatorThepageexplainstheOptTreesheetoftheBinomialOptionPricingCalculator,whereyoucanviewtheoptionpricebinomialtree. OptionPriceTreeStructure TheoptionpricetreestructurematchestheunderlyingpricetreestructureintheUndTreesheet(seedetailedexplanation). ThetreeitselfisincolumnE(step0)andbeyond.Stepnumbersareinrow3.Timefromvaluationaspercentofyearisinrow2.Step0isthemomentofvaluation;thelaststepisoptionexpiration.Numberofnodesineachstepequalsthestepnumber+1,soeachstephasonenodemorethanthestepbefore. HowOptionPricesAreCalculated Onedifferencebetweentheunderlyingpricetreeandtheoptionpricetreeisthedirectionofcalculation.Whiletheunderlyingpricetreeiscalculatedfromlefttoright(fromthecurrentunderlyingpriceinstep0toarangeofunderlyingpricesatexpiration),theoptionpricetreeiscalculatedbackwards–fromoptionpayoffsatexpirationtocurrentoptionprice. TheExcelformulasintheOptTreesheetnodes(sameformulainallnodes)maylookcomplicated,buttheyareinfactjustseveralsimplerformulascombinedinanestedIFfunction,becausethecalculationsaredifferentfor1)finalnodeandearliernodes2)callsandputs. OptionPayoffatExpiration PayoffatexpirationineachfinalstepnodecanbecalculatedfromthefinalstepunderlyingpricesintheUndTreesheet.Becausethetreesheetshaveidenticallayout,everycellintheOptTreesheetcontainsthesamenodeasthecellinthesamerowandcolumnintheUndTreesheet. CalculatingEarlierNodes Oncewehavepayoffatexpiration(theoption’svalue)forallthefinalstepnodes,wecangobackwardsthroughthebinomialtreeandcalculateoptionpricesatearliersteps.Everynode’soptionpricedependsonoptionpricesatthetwonodesinthesubsequentstep(thenodegoingupandthenodegoingdown).ForAmericanoptions,themodelalsochecksateachnodewhetherearlyexerciseisprofitable(thisiswhentheoption’sintrinsicvalueisgreaterthantheoption’svaluecalculatedfromthesubsequentstepnodes). Ifboththesubsequentnodeshavezerooptionprice,thecurrentnode’soptionpriceisalsozero(generallyoptionpriceiszeroineverynodefromwhichallpathsleadtotheoptionexpiringoutofthemoney).Forcalls,usuallysomenodesinthebottompartofthetree(whereunderlyingpricesarelow)willhavezerooptionprices,whileforputsitwillbesomenodesintheupperpart(whereunderlyingpricesarehigh).Howmanyandwhichexactly,dependsontheparticularcombinationofinputs. CurrentOptionPrice Oncetheoptionpricecalculationshavegonebackwardsfromthefinalstepthroughtheentiretree,thecurrent(step0)optionpriceiscalculatedincellE4. Treevs.VBACalculations TheresultingoptionpriceswhichyoucanseeintheMainsheetandinthechartarenotcalculatedinthetreesheets.InsteadtheyuseacustomVBAfunctionnamedBinOp.Thecalculationsareexactlythesame,givingidenticalresults.YoucancomparetheoptionpricevaluesincellE4inOptTree(calculatedfromthetreesheets)andcellE4intheMainsheet(calculatedwiththeBinOpfunction). CalculatingbinomialoptionpricesinVBAratherthaninExcelsheetshasseveraladvantages.Firstly,itdoesn’trequiresettingupseparatetreesheetstocalculatemultipleoptionpricesatthesametime(suchasforthechart).Secondly,itisfaster.Thirdly,itmakescalculationoftheGreeksfasterandeasier. Infact,thecalculationsintheMainsheetwouldworkevenifthetreesheetswereremovedfromthecalculator.Thetreesheetsaremainlyforviewingpricesatintermediatestepsandnodes,whichisnotpossiblewiththeBinOpVBAfunction. All»ExcelCalculators»BinomialOptionPricingCalculatorBinomialOptionPricingCalculatorUserGuideEnteringInputsStockandETFOptionsDividendsIndexOptionsCurrencyOptionsFuturesOptionsModelsandNumberofStepsCox-Ross-RubinsteinModelJarrow-RuddModelLeisen-ReimerModelUnderlyingPriceTreeOptionPriceTreeOptionGreeksWorkingwiththeChartScenarioAnalysisPreferencesBinomialOptionPricingCalculatorDownload MoreinExcelCalculators OptionStrategyPayoffCalculatorOptionStrategySimulatorOptionPortfolioManagerPriceProbabilityCalculatorBlack-ScholesCalculatorBinomialOptionPricingCalculatorHistoricalVolatilityCalculatorImpliedVolatilityCalculatorAverageTrueRange(ATR)CalculatorRelativeStrengthIndex(RSI)CalculatorFuturesPriceCalculatorDescriptiveStatisticsCalculator Haveaquestionorfeedback?Sendamessage.Ittakeslessthanaminute. 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