Option market-making and vol arbitrage
The agent’s view is factored in to a realised-vs-implied vol model
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Vladimir Lucic and Alex Tse introduce a market-making model for options that encompasses the trader’s view on the underlying volatility versus the market-implied volatility surface. An approximately optimal strategy is derived in closed form, where the optimal bid and ask levels depend on the expected volatility arbitrage profits associated with the quoted options. The authors demonstrate how risk control over customised factors can be incorporated within the
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