For this site, there are three primary sources used for data study.
Current Option Tables
For many studies, it helps to have real premium pricing and other measures like the “Greeks.” Often, theoretical models or historic data will suggest conclusions that are difficult to replicate in real life. Using data from current or recent option pricing tables from brokers or reliable name brand companies allows for study of real life situations. Typical sites would be Schwab.com, Yahoo Finance, or Fidelity.com.
Tables are copied as text and pasted into spreadsheets for analysis. It has been found that there are lots of uses for this type of data for analysis. For example, this is the only way to observe the actual skew of volatility across time and underlying prices.
Historic Data
For many studies, historic data going back many years can be helpful. There are numerous sources of free data on the Internet. For a good starting point the Chicago Board of Options Exchange (CBOE) site, cboe.com has extensive historical data for many indexes and option measures that are free and easy to download. Yahoo Finance and Google also have many free resources.
Theoretical Models
After some trial and error, the basis for most theoretical studies has come from a spreadsheet downloaded from the Internet for free. The site is OptionTradingTips.com/pricing/free-spreadsheet.html. The workbook download has built in macros that calculate option prices and Greeks based on the Black-Scholes model. You don’t really have to know much about the Black-Scholes formulas to use the spreadsheet, and the formulas are buried in the macros so you don’t have to deal with them. However, the site explains the formulas, and if you open up the macros, you can see the formulas, which are a bit complex. You can then choose to use the same formulas to make your own spreadsheets, or keep the macro-based approach from the site’s workbook.
A watch-out is that this model doesn’t have a way to model volatility skew, which has a significant impact on prices. An extra layer of assumptions has to be added to take this into account. Skew isn’t consistent and varies significantly over time based on a variety of factors. For most theoretical studies used on this Data Driven Option Trading website, a custom skew model and volatility change model was used to take into account the impact of changing underlying prices over time on volatility of all strike prices at different expiration dates.
