Option market-making and vol arbitrage. The agent’s view is factored in to a realised-vs-implied vol model

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. 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. We demonstrate how risk control over customised factors can be incorporated within the trading algorithm, which in turn can improve the resilience of the market making strategy against unexpected movements of the implied volatility surface