Charm (C) in options trading, particularly relevant in institutional crypto options, is a second-order Greek that measures the rate of change of an option’s delta with respect to the passage of time. Specifically, it quantifies how much an option’s delta is expected to decay each day as the expiration date approaches, assuming other factors like underlying price and volatility remain constant. It provides insight into the time-dependent sensitivity of an option’s exposure.
Mechanism
Charm is mathematically derived from the Black-Scholes model or similar pricing frameworks, representing the partial derivative of delta with respect to time to maturity. A positive Charm indicates that delta will increase as time passes, while a negative Charm suggests delta will decrease. For instance, a long call option typically has negative Charm, meaning its delta reduces as time goes by, reflecting a diminishing probability of the option finishing in-the-money.
Methodology
Traders utilize Charm to manage their portfolio’s delta exposure over time, particularly for options with shorter durations or those near expiration where time decay is more pronounced. It aids in forecasting the daily adjustments required to maintain a delta-neutral position, which is crucial for market makers and arbitrageurs in crypto options trading. Understanding Charm allows for more dynamic hedging strategies and a refined approach to managing the temporal erosion of option value.
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