Black-Scholes was created to price European-style options, where exercise only at expiration makes modeling an option's behavior easier. However, Black-Scholes can work for American-style options too as it is easy to program and can quickly calculate all of the greeks.
Today, Tom Sosnoff and Tony Battista are joined by Tom "TP" Preston as he discuss how the differences in the option styles impact the effectiveness of the model. TP explains that you can use Black-Scholes to calculate theoretical option values below parity for in the money options so it is unsuitable for American-style options. This is because if an American-style option trades below parity, it creates an arbitrage opportunity. Due to this, TP explains that you can use the binomial model instead. The binomial model is analogous to Black-Scholes and creates theoretical values that are almost equivalent. Though it is lower to calculate than Black-Scholes, the binomial model can be used to price American-style options!
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