50ETF Option Implied Volatility Surface Modeling And Strategy Application

As an important attribute of options derived from BS formula in reverse,implied volatility plays an important role in studying the nature of options and formulating relevant trading strategies.Since the domestic options market was not very mature,the research on implied volatility surface mainly focused on the options market in the United States or Chinese Hong Kong.But now the SSE 50 ETF options have been running smoothly for 5 years in China,which is relatively mature.In this paper,it is expected that from the perspective of fitting the actual situation,as far as possible,the data processing should be strictly screened to select the option contracts conforming to the conventional volatility and eliminate the option contracts with obvious mispricing,so as to establish a dynamic model of implied volatility surface fitting the domestic SSE 50 ETF option market.According to the surface model,the volatility surface arbitrage strategy is constructed,which is consistent with the actual situation in terms of condition setting.It is hoped that it can be applied in practice to give some support to the arbitrage trade of 50 ETF options.This paper chooses the daily data of SSE 50 ETF options from February 9,2015 to December 31,2019.After a rigorous data cleaning,92202 sample data were obtained.And then after the option implied volatility surface smoothing and statistical grouping,we can see a lot of features: 1.For the same remaining time period,the phenomenon of volatility smile still exists,which means the implied volatility of the out-of-the-money options and in-the-money options is higher than the at-the-money options.It presents smile characteristics;2.Almost all options close to at-the-money have relatively stable implied volatility in different remaining terms,which is maintained at about 22%;3.Options that are close to the expiration date and deviate from at-the-money tend to have higher implied volatility.After long-term and short-term tests of static modeling of the implied volatility surface,it is found that several commonly used deterministic rules cannot well explain the variation law of implied volatility in SSE 50 ETF options market,which indicates the necessity of introducing the dynamic model of implied volatility surface.Based on the analysis of the time series features of five parameter factors,it can be seen that it is unreasonable to model the implied volatility surface by static model.The dynamic model of the implied volatility surface with time-varying parameter factors should be used to describe the variation features of the implied volatility surface.In this paper,the "two-step method" is adopted to conduct dynamic modeling of the implied volatility surface model.The viscosity delta rule is selected to establish the cross-sectional model.And the VAR model is used to model the time series of parameter factors,so as to successfully construct the dynamic model of implied volatility with good fitting effect.This paper gives a detailed description of the definition of volatility arbitrage,and gives two understandable reasons for why volatility arbitrage should be carried out.The first reason is that the underlying direction is not easy to guess,volatility is relatively better to predict,the mean reversion is stronger;The second reason is that if you can really guess the right direction,you don't need to go to all that trouble to trade relatively complex options,rather than directly trading the underlying subject or its directly related futures.It also introduces four volatility arbitrage strategies related to the constructed implied volatility surface and their principles: the implied volatility and forecast volatility arbitrage of the same option,volatility skew arbitrage,volatility cone arbitrage and the more prominent volatility surface arbitrage.Options implied volatility surface as a combination of skewed and volatility term structure of product,can make us at the same time combined with two dimensions to see the change of volatility,in order to compare option volatility in different degree and different maturity date.The arbitrage strategy can extend from skew arbitrage and cone arbitrage to surface arbitrage.Based on the fitted dynamic model of implied volatility surface,this paper constructs a delta neutral implied volatility surface arbitrage strategy for the options contracts of 2016-2018 in the sample and 2019 out of the sample respectively.The condition settings of the strategy are close to the actual market conditions.Through the comparison of the back-test results of the implied volatility surface arbitrage strategy inside and outside the sample,it shows that the arbitrage strategy is relatively stable and the arbitrage effect is relatively good,and it also shows that the fitted volatility surface dynamic model has certain reference significance.