Advanced Options Strategies

Overview

Go beyond basic option strategies (covered call / protective put) and focus on trading opportunities along the volatility dimension. Core idea: option price = intrinsic value + time value, and advanced trading essentially trades the volatility expectations embedded behind that time value.

Applicable scenarios:

• Identifying arbitrage opportunities when the volatility surface is abnormal (skew / term structure)
• Fine-grained management of portfolio Greeks exposures (not just Delta hedging)
• Building structured strategies across maturities and strikes
• Practical application in 50ETF / 300ETF / commodity options

Core Concepts

Volatility Surface

Three-dimensional structure: strike × expiry × implied volatility.

Key dimensions:

Dimension	Meaning	Typical Shape
Smile / Skew	IV across strikes for the same expiry	China A-shares: left-skewed (put IV > call IV)
Term Structure	IV across expiries for the same strike	Normal case: near-month IV < far-month IV
Surface dynamics	Parallel or nonlinear movement of the entire surface	In panic, the whole surface lifts, and near-month IV lifts faster

SABR model parameters:

α (alpha): initial volatility level, around 0.2-0.5
β (beta): CEV exponent, equities usually use 0.5-1.0
ρ (rho): correlation between volatility and the underlying, usually -0.3 to -0.7 in China A-shares (negative = left skew)
ν (nu): volatility of volatility (vol of vol), around 0.3-0.8

Local Vol vs SABR:

• Local Vol (Dupire): backed out from market prices, exact fit but unstable extrapolation
• SABR: parameterized model, 4 parameters capture surface dynamics and extrapolate more reasonably

Dynamic Greeks Management