While most traders are familiar with delta, theta, and gamma, fewer understand charm. Also known as delta decay or DdeltaDtime, charm measures how an option's delta changes as time passes. Understanding charm can help you anticipate how your position's directional exposure will shift, even when the underlying stock does not move.
What is Charm?
Charm is a second-order Greek that measures the rate of change of delta with respect to time. In simpler terms, it tells you how much your delta will change overnight or over the weekend, assuming the stock price stays the same.
Mathematical definition: Charm = change in delta / change in time. It is typically expressed as delta change per day.
For example, if an option has a charm of -0.03, its delta will decrease by approximately 0.03 over one day (all else being equal). A call option with a delta of 0.50 would have a delta of 0.47 the next day.
Why Delta Changes Over Time
Delta represents the probability that an option will expire in the money and how much the option price will change for a $1 move in the stock. As time passes, these probabilities change:
- Out-of-the-money options: Become less likely to become profitable, so delta decreases (moves toward zero)
- In-the-money options: Become more certain to stay profitable, so delta increases (moves toward 1.00 for calls or -1.00 for puts)
- At-the-money options: Delta tends to stay around 0.50 but can shift based on other factors
Example: Charm in Action
You own a $105 call on stock XYZ trading at $100. The option has 30 days to expiration with:
- Current delta: 0.35
- Charm: -0.02
If the stock stays at $100, tomorrow your delta will be approximately 0.33. After a week (7 days), delta would be around 0.21. Your position is becoming less bullish over time even though the stock has not moved.
Charm Signs and Direction
Understanding the sign of charm tells you which direction delta is moving:
For Call Options
- OTM calls: Negative charm (delta decreases toward 0)
- ITM calls: Positive charm (delta increases toward 1.00)
- ATM calls: Charm is typically close to zero but can vary
For Put Options
- OTM puts: Positive charm (delta moves toward 0, becoming less negative)
- ITM puts: Negative charm (delta moves toward -1.00, becoming more negative)
- ATM puts: Charm is typically close to zero
Key insight: Charm accelerates as expiration approaches. The effect is strongest in the final week before expiration when delta can change dramatically from day to day.
The Weekend Effect
One of the most important practical applications of charm is understanding the weekend effect. When markets are closed, time still passes but the stock price cannot move. This means charm works over the weekend without any price movement to offset it.
Traders often notice that:
- OTM options lose delta over the weekend (they become less directional)
- ITM options gain delta over the weekend (they become more directional)
- The effect is most pronounced in short-dated options
Example: Weekend Charm Effect
On Friday, you hold an OTM call with delta 0.30 and charm of -0.04. Over the weekend (2 days), delta decay will be approximately 0.08, leaving you with a delta of 0.22 on Monday morning. Your position is significantly less bullish than it was on Friday.
Charm and Position Management
Understanding charm has practical implications for managing your options positions:
For Delta-Neutral Traders
If you are running a delta-neutral portfolio, charm tells you how much you will need to rebalance tomorrow. You can anticipate the hedge adjustments needed before they happen.
For Directional Traders
Charm helps you understand how your directional exposure will change over time. If you want to maintain a certain level of bullish or bearish exposure, you may need to adjust your positions as charm works on them.
For Income Traders
Option sellers benefit from charm on their short positions. As OTM short options lose delta over time, they become less sensitive to price movements, which is generally favorable for the seller.
Charm vs Other Greeks
Here is how charm fits into the broader Greek ecosystem:
| Greek | Measures | Relationship to Charm |
|---|---|---|
| Delta | Price sensitivity | Charm measures delta change over time |
| Gamma | Delta sensitivity to price | Gamma measures delta change due to price |
| Theta | Time decay of price | Both relate to time passage |
| Vanna | Delta sensitivity to IV | Both are second-order Greeks affecting delta |
When Charm Matters Most
Charm has the biggest impact in these situations:
- Short-dated options: Charm accelerates dramatically in the final week before expiration
- Over weekends and holidays: Time passes without price movement, making charm effects obvious
- Large positions: Small changes in delta can mean significant changes in overall exposure
- Portfolio hedging: When you need precise delta control
- Pin risk situations: Near expiration when options are close to ATM
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Summary
Charm is a second-order Greek that measures how delta changes over time. While it may seem academic, understanding charm has practical benefits: anticipating weekend effects, managing delta-neutral portfolios, and understanding how your directional exposure shifts as expiration approaches. As you advance in options trading, incorporating charm into your analysis can help you make more informed position management decisions.
Learn more about options Greeks in our guides on vanna and Greeks for spreads.