Call and Put as Fast as You Can

In the always high-pressure world of the equity markets, the pressure has been dialed up on one of the most intensely speculative forms of financial risk analysis, the pricing of equity options.  Earlier this year a software developer in Ireland teamed up with British hardware company to release a white paper describing what they are calling a new speed record in the pricing of options ––1 million options evaluated in 17 seconds.

When you consider what an option is and how it functions in the equity markets, this speed is mind-bending––and, not incidentally, worrisome.  An option is a contract to either buy or sell an asset at a given price.  The option itself is purchased, and this creates a market for options as well as for their underlying equities.  The seller offers an option called a put and the buyer’s option is called a call.  Options have expiration dates after which they are worthless.  Between the time when an option is purchased and when it expires, it’s value can fluctuate.  This makes the trading of options pretty risky, and an obvious application for any kind of Monte Carlo in Excel software.  Monte Carlo simulation is just one of a number of statistical analysis techniques that are used to value options, but it is the one used by the high-speed entrepreneurs.

Conveniently, for their blazing model  the British companies used what’s called a European option, which must be exercised on its expiration date. This simplified their calculations by eliminating variability in time and the conditions that change over time–-and as anyone who creates financial analysis models will tell you, simplicity and speed are directly related. Nevertheless, when the acceleration software and the hardware were cranked up to full speed, the white paper reports, they were processing 30 billion option pricing iterations per second.

The drawback to this mind-boggling speed is that it’s mind boggling.  If they want to keep up, investors may not have even a moment to call or put. 

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