Black and Scholes Calculations

Modern option pricing techniques are often considered among the most mathematically complex of all applied areas of finance. Financial analysis are now able to calculate, with alarming accuracy, the fair market value of a financial option. Gecko Software, Inc., 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 5.0 is, first and foremost, 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 5.0 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.

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 by filling the gaps in the dinosaurs DNA strand with frog DNA allowing 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 an 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 Jurassic Park theme, the process that creates and inserts the theoretical data into the actual data stream is code named "Frog Data."