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Definition: Vanna measures how much an option’s delta changes as implied volatility (IV) changes. It’s crucial because market makers hedge not just against price movement, but also against shifts in volatility.
Why It Matters:
Trader Takeaway: During volatility crushes (post-earnings, FOMC), vanna unwinds can push price in unexpected directions. You can anticipate these flows by watching for changes in implied volatility near key strikes or using vanna exposure charts.
Market makers aim to stay delta-neutral. Vanna positioning determines what action market makers take as implied volatility changes. Their reactions depend on the vanna regime:
Charm, also known as delta decay, measures how much an option’s delta changes as time passes. It’s a second-order Greek that becomes critical near expiration, especially for options near the at-the-money (ATM) strike
Why It Matters:
Market makers hedge delta exposure, and as delta decays, they must adjust their stock positions daily.
Negative net charm means MM deltas decrease. This means the must re-hedge by buy shares to remain delta-neutral.
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