Dear all, When doing the option market making, what is frequency that we need to adjust the implied volatility surface for quoting ? General Speaking for US market, or the European Market Many thanks.

Hi Guitar trader, it depends a lot on what market regime you are considering, and what type of strategy you are applying.If your spreads are relatively wide and your underlying vol is relatively stable, you will not have to adjust more than a couple of times a day if you are just "passively" quoting and expect your counterparts to cross bid/offer.If your spreads need to be tight, for example Index options market making you will need to update your volatility much more often as you might need to consider invetory management issues where you would not want to trade beyond a certain limit imposed for risk management purposes. In this case you might find yourself adjusting your volatility surface quite often in regards of the target position you want to keep or unwind.Can you give more detail regarding which type of underlyings you are considering, and what market making strategy you are targeting ?

GuitarTrader,Most banks now have "auto-fitters" which try to fit the vol automatically. Generally, for option market making fitting the vol surface at least a few times a day is warranted.You should also think about your purpose, fitting the vol assumes that the market generally is correct and fairly priced. So then you have to rely on other tools or safeguards.For example, you might want to consider how you manage your inventory; if someone keeps buying some teeny, low-delta options off of you, then re-fitting the vol might not let you realise there is some corporate action or pending news about to take place. Sometimes, option market makers end up with some crazy risk profiles that they need to get out of.

Could you please clarify the best way to calibrate impl.vol by marketoption prices? How to combine Puts and Calls? Could the difference be usedas arbitrage?Thanks a lot in advance