Front office traders in a sell-side derivative houses can involve in a variety of businesses. A few of them are :
Flow - High net worth investors/Buy Side/Coporates willing to buyorsell options to finance or hedge their respective portfolios. Profit making is primarily through commissions.
Option Market Making - Dealer quotes a buy and sell price to maintain liquidity in the market and has to honour any trades done against them. Money is made through spreads.
Exotics business - Special clients requiring complicated products which involves combinging various vanilla products.
All of these have one fundamental technical requirement to do well. Pricing of options, which involves pumping various inputs(market data or derived market data) into mathematical pricing models(quant libraries) to generate a fair price of the option. The fair price is the value of the option based on the firm's model assumptions and other data eg. credit worthiness.
Volatility surface management has always been a critical aspect of the derivatives pre-trading pricing activity for front office trading. In addition to volatility, the other assumptions data that go into the Black Scholes formula for pricing an option are spot price(K), options strike(S), interest rate(r), time to expiry (t), dividend schedule (d) and borrow cost rate(b).
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