Optimal option market making and volatility arbitrage
Speaker: Alex Tse
Affiliation: University College London
Abstract
We introduce a market making model of options which can encompass the trader's view on the underlying volatility versus the market implied volatility surface. We derive an approximated solution in closed-form, where the optimal bid and ask levels depend on the expected volatility arbitrage profits associated with the quoted options. We show that the model can be extended to include additional features such as trading position limit, market making of arbitrary European derivatives, simultaneous market making of multiple options, and incorporation of risk control over customised factors. This is joint work with Vladimir Lucic.
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