Vanna & Charm

Gamma told one story: when the price moves, a dealer's delta shifts, so they must trade the underlying to stay neutral. That's the loop behind GEX. But price isn't the only thing that moves a dealer's delta. Two other things shift it just as surely — how jumpy the market is expected to be, and the simple passage of time. Each one creates its own hedging flow, and the terminal tracks both.

Those two flows are vanna and charm. They are the same dealer-hedging loop you already know — only the nudge comes from volatility or the clock instead of from price. Once you have them, the Vanna / Charm compass on the dashboard reads like a sentence.

Vanna: delta reacts to volatility

Start with a fact that surprises people: a dealer can be forced to trade even when the price hasn't moved at all. Why? Because delta doesn't only depend on where price is — it also depends on how much movement the market expects, the implied volatility from lesson 3.

Vanna is the name for that link: the change in delta for a change in IV. When IV moves, every option's delta shifts a little, the dealer's book is no longer neutral, and they have to re-hedge in the underlying — a flow driven purely by a change in mood, not in price.

The cleanest example is the volatility-reset rally. After a big event passes — an earnings print, a Fed meeting — the fear premium drains out and IV falls hard. For a dealer book positioned the usual way, falling IV nudges their delta such that, to stay neutral, they have to buy the underlying. That buying lifts price, the tape calms further, IV bleeds more — a quiet, self-feeding grind higher on no real news. The mirror can happen too: a sudden spike in IV can force selling. Which way it cuts depends on how the dealers are positioned.

The terminal sums this across the whole board into net vanna (shown as VEX), and it works out the direction: given how dealers are positioned right now, would a rise in IV have them buying (a supportive bid) or selling (amplifying a drop)? That read is the "VEX Curve" line and the vol trigger level on the dashboard.

Charm: delta reacts to time

The second hidden flow needs nothing to happen at all — just the clock to tick.

As an option ages toward expiry, its delta drifts on its own. An out-of-the-money option slowly gives up hope, its delta sliding toward zero; an in-the-money one firms up, its delta climbing toward one. Charm is that delta drift per unit of time. And because the dealer's delta is drifting, they must keep re-hedging just to stand still — a flow created by time alone.

Charm is tiny when expiry is far away and enormous as it approaches, which is why it dominates the last hour of the session and the run into OPEX and 0DTE. As all those near-expiry deltas drain at once, dealers trade the underlying to keep up, and that steady, one-directional hedging is a big part of the familiar end-of-day drift. Near a heavy pin, charm hedging tends to nudge price toward that strike into the close.

The dashboard reads this as net charm (CEX) and the "Charm EOD" tag, which labels whether that drift is currently leaning price up or down into the close.

The same loop, a different trigger

It's worth seeing that none of this is new machinery. It's the exact hedging loop from the dealer lesson — a nudge to the dealer's delta, a forced trade to get back to neutral, which is itself a flow into the market. Gamma's nudge is a price move; vanna's is an IV move; charm's is the clock. Same loop, three triggers.

1. 1Price moves up

   Spot rallies into the dealer book.

   ↓→
2. 2Dealer delta shifts

   Short gamma → dealers grow shorter as price rises.

   ↓→
3. 3Dealer must hedge

   To stay neutral they BUY into the rally.

   ↓→
4. 4Flow hits price

   Buying adds fuel — the move accelerates.

↺

Amplifying loop: Each turn pushes price further from where it started. The flow in step 4 feeds back into step 1.

Read the loop above with that in mind: wherever it says "price moves," picture "IV moves" for vanna or "time passes" for charm. The dealer is still just reacting by rule to keep the book flat.

Reading the compass

Because vanna and charm act at the same time, the dashboard plots them together on one small grid — the Vanna / Charm compass. Net vanna runs along one axis (the IV-driven flow), net charm along the other (the time-driven flow), and a live dot shows which quadrant the market is in right now.

Example snapshot

Each quadrant is just a combination of the two flows — for example, vanna and charm both leaning supportive (a calm, well-bid grind) versus the two pulling against each other (a more conflicted, jumpier tape). You don't have to memorise the names; the value is seeing, at a glance, whether the volatility flow and the time flow agree or fight.

What to carry forward

• Vanna = the IV-driven hedging flow: a change in implied volatility moves dealer delta, forcing trades even when price is still. Footprint: the vol-crush grind.
• Charm = the time-driven hedging flow: deltas drift as expiry nears, forcing re-hedging into the close. Footprint: end-of-day drift and pinning.
• Both are the same dealer loop as gamma — only the trigger differs (price → IV → time).
• The terminal sums them as VEX (vanna) and CEX (charm) and plots them on the compass; the vol trigger marks where upside gamma support runs out.

You now have all three hedging flows — price, volatility, and time. The last lesson puts them on the map: how this positioning makes some levels pin and others break.

Next step

Read the Vanna / Charm compass.

The dashboard plots net vanna against net charm and marks which way IV and time are pushing dealer hedges right now.

See the live compass →