Investigation on the Mechanism of American Put Option Pricing under Binomial Consideration

Abstract

American options are style of options which allows the holder to exercise their rights at any time before and including the expiration date. Different from European options, that only allows the holder to exercise their right at the expiration date, American options seems to bring the holders with more freedom. There are two common types of options: calls and puts. In this investigation, we will be focusing on American put options specifically. Puts give the buyer the right, but not the obligation for selling the underlying asset at the strike price in the contract. Moreover, options may have their own pricing theory, that is a model to estimate the value of options by assigning a price, which is known as premium. With the theory, American option holders could make the decision of holding the option or not. Therefore, the pricing model of an American option seems to be significant and important for the final decision.