Option Pricing 101

One-Period Binomial Tree

We start will the simplest one-period binomial tree model, which assumes the stock price can take on two values in one period of time. Assume that the stock is currently trading at \$100 and the two possible outcome for the next period is \$120 and \$80 with equal probability. We have a one-period call option with strike price \$100. We also assume the interest rate is 0\% for simplicity.