Hi all, I was pretty sure that someone would have asked the question before but i found nothing on this forum I'm begining thinking on volatility arbitrage and just worked on volatility forecast in discrete time and wanted to go to the next level.That's why i am actually working with stochastic volatility model for volatility arbitrage.Just wanted to be sure: when you want to make a volatility arbitrage strategy with a sto vol model, you have to: - Calibrate the model - Calculate the option prices for calls (or puts/straddle/strangle/butterflly) and extract the BS implied vol - Compare it to the implied vol from available options in the market - Buy / sell / do nothing depending on the difference between the two volsIs that right or am y totally wrong ?By the way, another non linked question from the previous one:What do you think the most important skills are for a market maker on vanilla options (on stocks/indices/liquid commodities)What are the studies (or profile) to join a prestigious bank as a market maker on vanilla options? Is my masters degree in applied maths (focusing on proba/sto calculus/stats) is ok ?Thank you,

Hi,I'm no expert on this particular topic, but since nobody have answered I'll. Basically I have the same background as yourself.In general, I would say that volatility arbitrage is certainly possible, but probably one of the harder things to earn a living from - especially if you are working in one of the mature markets e.g. equities. You are basically saying that you have a better model than the rest of the market, which would put you in a nice place. What would you be doing that no one else have thought about? Except from that little objection, your approach seems fine. Still, though, it is so generic and widely appreciated that it really don't provide any information to what you are planning on. Which is the reason that you don't get too many answers...I'd say you need some experience to get into a prestigious bank given a M.Sc.-level education.Stale

Up.I juste need to know if the approcach is fine: if not, what are the steps to do when you want to do volatility arbitrage with a stochastic volatility models.

You basically described betting on the actual vol surface converging to "your" surface. Can you be sure that this will actually take place?

Isnt it the thing in volatility arbitrage ? Betting than "your" volatility will be closer to the market as the one quoted ?Juste wanted to know if the general approach (ie correct whatever the model ) was good or if an arbitragist in the industry used to work diferently.

elio is making the distinction between trading and arbitrage. The standard meaning of arbitrage is riskless profits...I would concentrate on understanding the basics (ie forget stochastic vol), and work through eg vol trading by euan sinclair. Try and run some simulations and identify how much your strategy would make you. Then try on real/new data. Identify bid/ask spreads etc. how would you calibrate the stochastic vol model? to liquid option prices or historically? If to liquid option prices, then presumably you then want to identify those points what are significantly far from your model surface, and buy/sell accordingly, delta hedging to your model. There will be plenty of problems - eg stoch vol model not calibrating to liquid options. the calibration error in turn causing your fitted parameters to be unstable....but the most important problem is that you have no guarantee that the market follows your stoch vol model.