Modern option pricing techniques are often considered among the most
mathematically complex of all applied areas of finance. Financial
analysis has reached the point to where we are now able to calculate,
with alarming accuracy, the fair market value of a financial option.
Gecko Software employs the calculations developed in 1973 by Fischer
Black and Myron Scholes. This model is known as the "Black and Scholes
Options Pricing Model."
The Black and Scholes pricing model uses a sophisticated mathematical
formula to calculate the theoretical value of an option using variables
such as; Market Open, High, Low, and Close values, Interest Rates,
Volatility calculations and other such information to give us these all
important values.
Track 'n Trade Pro puts to use these unique abilities in several
different ways. First and foremost, Track 'n Trade Pro is a trading
simulation software application where you are able to go back in time
nearly 30 years and "practice" trading forward, one day at a time. In
essence, we are giving a trader 30 years of simulated trading experience
in a matter of hours, days, or possibly weeks. We allow the trader to
use actual historical futures market OHLC (Open, High, Low, Close) data
to simulate trading the commodities market. In that regard, it would be
nearly impossible for us to assemble a complete set of 30 years of
historical options data which would allow users this same historical
data training privilege. Also, due to the massive amount of data this
would require, and given today's limits of computer speeds, hard drives,
and storage capacity, trying to provide this type of data history to a
typical user would simply put this capability out of reach for the
common trader.
This is where the Black and Scholes pricing model comes into play. Our
skilled computer scientists at Gecko Software have created a way for us
to use the data generated by the Black & Scholes data formula to
recreate "on the fly" historical options data as needed by the user.
This way a trader using our software can recall acutely accurate
"simulated" options data from 30 years ago without actually having
hundreds of megabytes of options data history stored on their computer.
The trader can then simulate trading the financial options market with
unparalleled accuracy. This unparalleled capability allows new traders
the ability to learn and practice basic trading strategies that can then
be taken to the actual markets. It also allows experienced traders the
ability to create and back test advanced simulated trading models and
systems.
Another way in which Gecko Software computer scientists have implemented
the Black & Scholes formulas to help our traders is with two very unique
indicators which sit below a chart of the underlying financial asset. As
the Black and Scholes formula dictates what the actual "theoretical"
value of an option should be on any given day, Track 'n Trade Pro will
plot the "actual" value of the option along side the Black & Scholes
model. This creates an overvalued or undervalued indicator, which lets
our users know, from a simple graphical representation, if the current
price of an option is inline with market sentiment and trading at a
premium or a discount.
One stumbling block that Gecko Software engineers had to overcome when
creating our options trade simulator was that options data is often
times very spotty and full of holes, and due to the enormous amount of
data generated by the options exchanges there is very little done to try
and repair these holes or bad data ticks. When options trade, they begin
a data stream where they generate an Open, High, Low and Close for each
day's trading range, but some options, which are usually further out of
the money, don't trade every single day. This causes gaps or holes in
the data stream. One way or another, these gaps or holes are either
filled, or just left blank. Often times, these gaps are filled by data
vendors who simply pull yesterdays values forward to today. They'll do
this for weeks on end, which only serves to create a very inaccurate and
unreliable value stream, a stream of data that would be difficult to use
in any kind of simulated trading environment or to provide much
real-market value.
Just like the genetic scientists did in the classic movie Jurassic Park,
where they filled the gaps in the dinosaurs DNA strand with frog DNA
which allowed them to recreate or clone a dinosaur; our computer
scientists here at Gecko Software fill the gaps in the live options
market data stream with Black & Scholes "theoretical" prices, giving a
more accurate representation of the actual options value. This allows
our users the ability to have a more complete and highly accurate
representation of what actual market data would have been on any given
day.
To differentiate the fictitious theoretical data within the data stream,
we tag it with a trailing asterisk (*) so our users will know when they
are looking at actual market data reported by the exchange, or a
theoretical value inserted into a gap by the Black & Scholes model. In
keeping with the classic movie Jurassic Park, the process that creates
and inserts the theoretical data into the actual data stream is code
named "Frog Data."
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