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Track 'n Trade Futures End of Day Options
Black & Scholes
Video Transcript
Modern Options 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 value of a financial Option.
Gecko Software employs a calculations developed in 1973 by Fischer Black and Myron Scholes. This model is known as the Black-Scholes Options pricing model. The Black- Scholes Pricing Model, uses a sophisticated mathematical formula to calculate the theoretical value of an Option using variables such as: Market Open, High, Low, Close Values, Interest Rates, Volatility Calculations, and other such information to give us such 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 a user is able to go back in time nearly 30 years and practice trading forward, one day at a time. In essence, we're 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, 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 the same historical data training privilege. Also, die 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-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 markets, 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 formula to help our traders, is with two very unique Indicators, which sit directly below a chart of the underlying financial asset. As the Black-Scholes formula dictates what the actual theoretical value of an Option should be on any given day. Track 'n Trade will plot the actual value of the Option alongside the Black-Scholes model. Creating an overvalued or undervalued Indicator. Letting our users know from a simple graphical representation if the current price of an Option is in line with a market sediment, 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. Due to the enormous amount of data generated by the Options exchanges, there's very little done to try and repair these holes, or bad data tics.
When Options trade, they begin a data stream where they generate an open high, low close for each day's trading range. But some Options which are usually further out of the money, don't trade every single day; which 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 yesterday's value forward to today. Often times doing this for weeks on end, which always serve to create a very inaccurate and unreliable value stream. A value 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 fill the gaps in the dinosaur DNA strands 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. Which in turn, 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.
We differentiate the fictitious theoretical data within the data stream, by tagging it with a trailing asterisk. This way, 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.
Here at Gecko Software, 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.