charm exposure
Delta decay as expiry approaches — the capital required to hedge per hour.
Having established the dynamics of Vanna exposure, Charm follows the same mathematical symmetry with respect to time decay. Charm describes how delta changes as expiration approaches (measured in units of deltas per year). This contrasts directly with Vanna, which describes changes in delta as implied volatility fluctuates. We can perform the same thought experiment to gain an intuitive sense for Charm:
While the delta of ITM options increases in absolute value as time runs out, the delta of OTM options decreases in absolute value (they expire worthless).
So what about charm exposure? For each strike, 100 × charm × OI tells us how many shares we would need to hedge the delta decay of those contracts for an entire year. In order to get a more intuitive result, we divide by 365 days × 24 hours to get the shares needed per hour. Finally, we multiply by spot price to get the capital required for this hedge. Thus, our charm exposure charts approximate the capital required to hedge current inventory per hour, assuming all other variables are held constant. Once again, short options are netted out against long options for cleaner visualization.
Unlike vanna exposure, charm can be aggregated. We can directly compare the impact of 0DTE with 1DTE, and so on, as all are in units of dollars per hour.