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Intermediate

Practice Drills: Pricing an American Option Using a Binomial Tree

A drill-heavy course for quant analyst aspirants, prop trading applicants and systematizing traders who know what a binomial tree is but have never priced an American option on one from scratch. Every lesson is a worked exercise on an NSE stock: you set up the inputs, calibrate u, d and p, build the tree by hand, roll it back with an early-exercise check at every node, map the exercise boundary, split out the early-exercise premium, validate against Black-Scholes and the intrinsic floor, extract the Greeks, deal with dividends, and finish by pricing and reporting an American put end to end in Python. The kind of exercise interviewers at prop desks and quant funds hand you on a whiteboard.

Binomial TreesAmerican OptionsEarly ExerciseCox-Ross-RubinsteinOption GreeksPython for Quant Finance

MODULES

5

DURATION

~3 hrs

TRACK

Quantitative Finance

What You'll Master

Turn the terms of an option on an NSE stock into the six inputs a binomial pricer needs

Compute u, d and the risk-neutral probability with the Cox-Ross-Rubinstein parameterization

Build a multi-step recombining stock price tree by hand and fill in terminal payoffs

Roll a tree back with an early-exercise check at every node and price an American put

Locate the early-exercise boundary and read which nodes should be exercised

Measure the early-exercise premium as the American price minus the European price

Sanity-check a tree price against intrinsic value, put-call bounds and Black-Scholes

Read delta, gamma and theta straight off the nodes of a finished tree

Handle dividend-paying stocks and explain when an American call is worth exercising early

Price, validate and report an American put end to end in a short Python script

Access Level

LEARNER

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Everything included

Full Text Playbooks

Actionable Exercises

Mobile Reading Mode

Lifetime Updates

Curriculum Breakdown

Chapter 1: Setting Up the Drill

3 Lessons

Drill Setup: The American Put We Will Price, and Why NSE No Longer Lists One9 min read

Drill: Converting Option Contract Terms into S, K, T, r, q and Sigma11 min read

Drill: Computing u, d and the Risk-Neutral Probability with Cox-Ross-Rubinstein11 min read

Chapter 2: Building and Rolling Back the Tree by Hand

4 Lessons

Drill: Building a Four-Step Stock Price Tree for an NSE Stock12 min read

Drill: Terminal Payoffs and European Backward Induction on the Same Tree11 min read

Drill: Adding the Early-Exercise Check at Every Node12 min read

Drill: Mapping the Early-Exercise Boundary from Your Finished Tree11 min read

Chapter 3: Checking and Decomposing the Price

3 Lessons

Drill: The Early-Exercise Premium, American Price Minus European Price11 min read

Drill: Sanity Checks Against the Intrinsic Floor, Put-Call Bounds and Black-Scholes12 min read

Drill: Reading Delta, Gamma and Theta Straight off the Tree Nodes12 min read

Chapter 4: Dividends, Calls and Convergence

3 Lessons

Drill: When an American Call Is Worth Exercising Early on a Dividend-Paying Stock12 min read

Drill: Handling a Discrete Cash Dividend on the Tree12 min read

Drill: Step Count, Convergence and the Odd-Even Oscillation10 min read

Chapter 5: Capstone

2 Lessons

Drill: Pricing an American Put in Python in Under 30 Lines12 min read

Capstone Drill: Price, Validate and Report an American Put End to End15 min read