Vanna and Charm: The Second-Order Greeks That Move Markets

Beyond First-Order Greeks

Delta, gamma, theta, and vega are first-order Greeks — they measure direct sensitivities. But options prices are influenced by more complex relationships between these variables.

Vanna and charm are second-order Greeks that capture how delta changes in response to volatility and time, respectively. They're less well-known but create significant structural forces that experienced traders monitor closely.

Vanna: How Volatility Changes Delta

Vanna measures how much an option's delta changes when implied volatility moves. Mathematically, it's the derivative of delta with respect to volatility (or equivalently, the derivative of vega with respect to the underlying price).

Why does this matter? Because implied volatility changes all the time. When VIX rises, the delta of out-of-the-money options increases — they become more sensitive to price moves. Market makers must adjust their hedges to account for this.

Vanna flows are particularly important around VIX mean-reversion events. When VIX is elevated and begins to decline, vanna flows push dealers to sell stock (as their delta hedges become oversized). This is one reason why markets often rally as VIX drops — vanna-driven buying creates a tailwind.

Conversely, when VIX spikes, vanna flows can amplify selling as dealers scramble to increase hedges.

Charm: How Time Changes Delta

Charm (also called delta decay) measures how much an option's delta changes as time passes, with everything else held constant.

As expiration approaches, at-the-money options see their delta rapidly move toward 0.50, while out-of-the-money options see delta decay toward 0 and in-the-money options see delta approach 1.0.

This matters for market structure because it means that delta hedges change overnight even if nothing else moves. Market makers must adjust their stock positions every morning to account for charm — creating predictable flows.

The Net Charm column in the Options Matrix shows you where these overnight flows will concentrate. Large negative charm at a strike means dealers will need to sell stock there tomorrow. Large positive charm means buying pressure.

Trading with Second-Order Greeks

For most traders, the key takeaway from vanna and charm is understanding the forces that shape market behavior beyond simple gamma hedging:

Vanna explains volatility-driven flows — why rallies accelerate as VIX drops, why selloffs intensify as VIX spikes.

Charm explains time-driven flows — why overnight gaps sometimes seem structural, why Monday mornings have predictable directional tendencies.

In GammaLens, the Greeks tool visualizes vanna and charm exposure across strikes, showing you where these second-order forces are concentrated. The Net Charm column in the Matrix gives you the overnight flow forecast at each strike.

Combining first-order (GEX) and second-order (vanna, charm) analysis gives you the most complete picture of market structure available.