Comparing Binomial Trees and Longstaff–Schwartz for American Options

Summary

The document asks whether Longstaff–Schwartz Monte Carlo is generally the preferred method for Bermudan or American option pricing. The response favors a binomial tree for American-style options, based on a comparison with Longstaff–Schwartz. It describes checking both methods against the Black–Scholes price of a European call, using the fact that an American call with the same inputs and no dividends should have the same value as that European call.

The author reports that the binomial tree produced prices closer to this reference for equal computation time. This is a limited comparison, not broad evidence that the tree is best across option types, models, exercise schedules, or market conditions. The document gives no details about convergence, implementation choices, or error measurement. Its conclusion should be treated as the author’s result for a particular benchmark rather than a general ranking of pricing methods.

Key ideas

• The response compares a binomial tree with Longstaff–Schwartz Monte Carlo for American option pricing.
• It uses the European call price as a benchmark when the corresponding American call has no dividends.
• The author reports closer benchmark prices from the binomial tree at the same computation time.
• The comparison does not establish which method performs best across other contracts or model settings.

Tags

# Is Longstaff-Schwartz best method for Bermudan options?


# Is Longstaff-Schwartz best method for Bermudan options?












What is the go-to method for pricing of Bermudan/American options?

I've heard the Longstaff-Schwartz method is really popular. Is it better than the other methods generally speaking? If not, which method is usually considered the best?

## Answer by Valometrics.com (score -1)

https://quant.stackexchange.com/a/51066

Binomial tree is better for american style options. I've already done comparison between LS montecarlo and binomial tree and i found that binomial tree gives more precise results for the same computation time.

For comparison, you know that european call and american call with the same inputs and zero dividend should give the same price. So, I've defined as a reference european call black & scholes prices and compared it with american calls prices using Binomial tree and LS montecarlo. Finally, i found that using binomial tree, the results were closer to the black scholes ones.

You can test it using my online pricing website ValoMetrics.com.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.