The binomial model uses a "discrete-time framework" to trace the evolution of the option's key underlying variable via a binomial lattice (tree); the given evolution then forms the basis for the option valuation. In general, the value of the option at any node in the lattice is determined - given the option style - using the risk neutrality[?] assumption for the price of the underlying at that node, and the value of the option at the two later nodes (or the exercise value at a final node). The procees is iterative, starting at each final node, and then working backwards through the tree to t = 0, where the calculated value is the value of the option in question.
wikipedia.org dumped 2003-03-17 with terodump