Arbitrage Strategy Of Option Implied Volatility Surface Based On SVI Model

The development of China’s options market can be traced back to 2005,but due to historical reasons and the unfamiliarity of market participants,the market size has always been small.With the capital market experiencing continuous growth over the last few years,China’s options market has also received more attention and support.However,there are currently some problems in China’s options market,such as lack of liquidity,high transaction costs,insufficient design and promotion of options products,etc.In this case,it is particularly important to study the implied volatility of options.By studying the implied volatility of options,we can better understand the market risks and expectations,thus providing more accurate risk management and decision-making basis for investors,and also providing important reference and support for option pricing and trading.This paper takes option implied volatility and arbitrage strategy as the main research object.This article uses the empirical data of CSI 300 Index Options.On the basis that the SVI model can well fit the features such as the "smile" of the option implied volatility surface,this paper proposes to weight the objective function of the parameter estimation of the SVI model,and introduce the prior information of the option market in order to further improve the SVI model.On this basis,combined with the idea of statistical arbitrage,the arbitrage strategy and risk management method of option market are explored.The following outlines the primary research content and outcomes presented in this paper:(1)The SVI model has been proven to have a good effect on the surface fitting of option implied volatility,and its parameter estimation is convenient and quick,so it is a popular research object of volatility models.This paper verifies that the SVI model is effective in the CSI 300 Index Options market.And this paper innovatively proposes to weight the objective function of the SVI model to distinguish the importance of options with different moneyness in the market.Based on the analysis of prior information such as option trading volume and intrinsic value,this paper proposes and compares 3 forms of weighting functions.Finally,the actual data proves that the effect of Vega weighting is the best.Compared with the unweighted objective function of the original SVI model,the root mean square error of the curve fitting has an average improvement of more than 10%.(2)Based on the fitting of the implied volatility surface by the SVI model,this paper proposes two option arbitrage strategies in combination with the actual market conditions.Including single option trading strategy and delta neutral hedging strategy.For each arbitrage strategy,this article conducts an in-depth analysis from both theoretical and practical aspects,including strategy construction,execution,return and risk assessment,etc.At the same time,the detailed operation process and empirical analysis are given.The single option trading strategy can use the options with pricing errors identified by the SVI model to achieve great returns.In the backtest of historical data for 3 years,its returns exceeded 100%,but its risks were slightly higher.The delta neutral hedging strategy can strictly control risks,and achieve considerable returns and high excess profits while maintaining a low level of annualized return volatility and maximum retracement.(3)Vega weighting the objective function of SVI model parameter estimation can effectively improve the profitability and risk control level of both single option trading strategy and delta neutral hedging strategy.Assigning different weights to different options helps to mine a more ideal volatility surface and improve the fitting effect.Empirical results show that doing so can not only make the strategy less risky,but also make the return higher.Finally,this paper also proposes further research directions for the deficiencies in the research.Including using a more effective model to fit the volatility surface,considering more market factors and risk control methods,in order to explore the characteristics of the option market more comprehensively and deeply.Thereby enhancing the reliability of the arbitrage strategy,helping investors to better avoid market risks,boosting the investment’s rate of return,and providing a useful reference for the development and innovation of the options market.