Charm is a second-order Greek which shows how changes in time relate to changes in delta (directional exposure). Charm is greatest at about 20 or 80 delta, and this is true for either puts or calls (Natenberg, 2015, p. 140). This means that the effects of charm are strongest when reasonably OTM, but not too far out.

Like vanna (changes in IV related to changes in delta) and theta (the time decay of an option’s price), charm is responsive to moneyness, which is whether it is OTM or ITM. If a strike is OTM, then it is gradually pricing in for that contract to expire worthless, and deltas will decay. But if a strike is ITM, then the price of the option will gradually increase from charm, as it prices in a 100-delta outcome of expiring in the money.

Strategy

Based on these shifting dynamics depending on moneyness, and if dealer positioning is modeled with a reasonable accuracy, then we can predict bullish or bearish flows that influence the market. For example, if dealers breach a major Call Wall and suddenly have many ITM long calls, then charm would be pricing those calls into 100 delta over time. This would strengthen their long calls and prompt dealer selling (as a bearish market flow) for them to get back to delta neutral.