There are many models for pricing options, of which the Black-Scholes option pricing model and the binomial option pricing model are the most popular. The binomial option pricing lattice was developed in 1979. Trinomial option pricing model, which is supposed to be more accurate than the binomial model, will give the same results as the binomial model but in fewer steps comparatively. However, the model never gained popularity. This article aims at understanding the reasons for the same.

Black-Scholes1 model was the first model to be developed in 1973. This model is mathematical and based on various assumptions; some of them unrealistic. It is a very useful model that involves the construction of a binomial tree to represent the various probabilities for the future price over the life of the option. But it cannot give the value of an American put option on a dividend paying stock. The Binomial2 option pricing model, on the other hand assumes that the option price can either go up or down over a time step. It does not assume that the price may remain unchanged. The pricing of American style options is important, as most publicly traded options are American (which means they can be traded on any day until maturity). In 1996, Boyle3 proposed the trinomial option pricing model.

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