In 1973, Black and Scholes put forward the Black-Scholes option pricing model to price options whose underlying asset price obeys lognormal distribution. Subsequently, Ross began to study the option pricing theory that the underlying asset price obeys non-normal distribution. 1976, Ross and John Caucos published a paper "Option Pricing Based on Alternative Stochastic Process" in the Journal of Financial Economics, and put forward the risk-neutral pricing theory.

1979, Ross, Caucos and Mark Rubinstein published a paper "Option Pricing: A Simplified Method" in the Journal of Financial Economics. A simple discrete-time option pricing method called Cox-Ross-Rubinstein binomial option pricing model is proposed.

Binomial option pricing model and black shell option pricing model are two complementary methods. The derivation of binomial option pricing model is relatively simple, which is more suitable for explaining the basic concept of option pricing. The binomial option pricing model is based on a basic assumption, that is, in a given time interval, the price movement of securities has two possible directions: rising or falling. Although this assumption is very simple, binomial option pricing model is suitable for dealing with more complex options because a given time period can be subdivided into smaller time units.

With the increase of the number of price changes to be considered, the distribution function of binomial option pricing model tends to normal distribution, and binomial option pricing model is consistent with Black-Hulls option pricing model. The advantage of binomial option pricing model is that it simplifies the calculation of option pricing and increases the intuition, so it has become one of the main pricing standards of major stock exchanges in the world.

Generally speaking, the basic assumption of binomial option pricing model is that the stock price changes in each period only in two directions, that is, up or down. The pricing basis of BOPM is that when buying options for the first time, you can establish a zero-risk hedging transaction, or use a portfolio to simulate the value of options, which should be equal to the price of options without arbitrage opportunities; On the other hand, if there are arbitrage opportunities, investors can buy two products with lower prices and sell them at higher prices, thus obtaining risk-free returns. Of course, this arbitrage opportunity will only exist in a short time. The main function of this portfolio is to give the pricing method of call options. Unlike futures, hedging in futures does not need to be changed once it is established, while hedging in options needs to be constantly adjusted until the option expires.