Black-Scholes Animation

SOFTWARE REVIEW

Black-Scholes Animation

Optionanimation.com Inc.

532 LaGuardia Place, PMB #305

New York, N.Y. 100 12

(212) 420-4769

www.optionanimation.com

Complexity

Overall rating: 3 disc symbols

Price: $39.95

System requirements: Windows 95/98/NT, CD-ROM, VGA screw capable of 800x600 resolution.

Reviewed by Howard L. Simons When was the last time you really enjoyed using a piece of software? The early days of PCs had something of a sense of whimsy associated therewith. But that was before we became hyper-caffeinated day-- trading Nasdaq freaks who could sit down before the simplest (and I do mean the simplest) handheld wireless Web-enabled asynchronous satellite-linked graphics-rich extendible scalable backwards-compatible device without wondering whether it should either be part of our portfolios or simply thrown to the dogs.

Sad to say, but those days of innocence are gone, and those who never understood the true joy of "Leisure Suit Larry in the Land of the Lounge Lizards" on a 386 running at 25 Mhz with 512 KB ram and a 20 MB hard drive are poorer for it. Now every time the chip designers push us further down the limits of Moore's Law, the software geeks come up with another binary hairball that bogs the machine down. Ask yourself: Does Office 2000 on the latest rocket sled run faster or slower than did the original Lotus 1-2-3 on an IBM PCAT? Thought so.

Yes, when Peter Lorre's Joe Cairo character turned to Sidney Greenstreet in "The Maltese Falcon," and shrieked "You fat bloated imbecile!" he surely anticipated the reaction of so many computer users who wonder why it now takes more storage to load AOL 6.0 than most mainframes had available only a few years ago - and the program doesn't send e-mail any faster or slower than the original AOL. I'm still steamed about that Time Warner thing.

Now comes Jerry Marlow (e-mail: jerrymarlow@jerrymarlow.com, which all kind of ties together) with Black-Scholes Animation. Hey, who doesn't like a good cartoon every now and then, especially if Jessica Rabbit's involved? Here's an educational program for options that allows users to change parameters such as volatility, time to expiration, strike price, etc., and see how the option's statistics change. More traders need this sort of training than would care to admit it.

Just load the CD, click on the single exec file, and the program comes up with a bright red screen with a number of point and click boxes for entering parameters and calling up sections of the program such as "Draw Your Forecast" and "Simulate Price Change." The resulting graphic outputs are very easy to read and interpret, and the accompanying manual provides excellent documentation of what you have done and are now viewing.

Of particular interest is the embedded random walk price generator and Monte Carlo simulation path program - not that any future path of a stock will ever follow any of the Monte Carlo outputs - but they're fun to watch emerge on your screen. In the old days, we used to refer to this process as garbage in/garbage out. Now it's the basis for value-at-risk.

Option purists may scream at some of the simplifications, most of which are acknowledged in the manual, such as "The assumptions that underlie Black-Scholes OptionsPricing Theory do not necessarily prove to be true in the marketplace." All of which is true, but we've been at this for nearly three decades and no one has come up with a better place to start with options than the original Black-Scholes.

Other simplifications are amusing, probably unintentionally so, such as "We need a forecast. You call up your broker and ask for a forecast." Oh, those fabulous forecasting brokers! Who could ever go wrong asking one of them?

In most areas of life, knowing what questions to ask is as critical as knowing the answers. This is particularly true in a field -- options pricing - that is replete with non-linear and co-dependent relationships. The program encourages users to link In what mathematicians call partial terms, examining the contribution of one variable with all other inputs held constant. Because volatility often is a function of both price movements and levels, this represents a serious drawback: New traders may delude themselves into thinking they've found the answer when all they've found is one answer.

A more serious drawback, however, derives from one of the program's best features and that is its construction of probabilistic price forecasts based on those simulations and on volatility. The user can be left with the impression that if we're 99.7% certain that the strategy's returns will be within a certain range, then the worst case is bounded. This is hardly the case, and one of the more interesting areas of options research -- extreme value theory - is devoted to those low-probability, high impact zones.

So, should a new trader seeking to learn more about option price behavior and strategies dive into an esoteric set of simulations or, worse, just run two or three bracketing cases and call it a day? Hardly. The best strategy for a newbie is to take some simple long option positions, understand how time, price and volatility interact and then sit back and be patient. The worst case outcome is he'll lose some money, and chances are he's done that before.

This program certainly will help in this regard. The caveats regarding simplification are alluded to in the manual, and the simplifications do not detract from the program's enormous value as a teaching tool for students, novice traders and those who suddenly find themselves in need of a reference for option behavior. More to the point, this program is simply a joy to use, and at $39.95, how can anyone go wrong?