ā” QUICK ANSWER: What is Charm Decay?
Charm (or Delta Decay) is a second-order option Greek measuring the rate of change of an option's Delta over time ($\frac{\partial \Delta}{\partial T}$). As an option approaches expiration, out-of-the-money contract deltas decay toward zero. This steady passage of calendar time forces options market makers to systematically rebalance their delta hedge, creating predictable weekend and expiry week market flows.
1. The Black-Scholes Charm Formula
Charm is calculated in Black-Scholes-Merton option theory as the partial derivative of Delta with respect to time ($T$):
Charm = ∂Δ / ∂T = - n(dā) * [ (r * dā) / (σ * √T) - (1 + dā * dā) / (2 * T) ]
Where $r$ is the risk-free rate, $\sigma$ is annual volatility, and $T$ is time to expiry in years.
2. Friday Weekend Rehedging & Expiry Afternoon Pinning
Charm decay accelerates rapidly during the final 3 days of weekly NIFTY option expiries:
- Friday Afternoon Rehedging: Because Saturday and Sunday pass without trading, 48 hours of Charm decay takes place over the weekend. Options dealers calculate weekend Charm decay on Friday afternoon and execute rehedging trades before market close.
- Expiry Afternoon Pinning: On Thursday expiry afternoons, OTM option deltas collapse to zero. Dealers who shorted OTM options close out hedging futures positions, pulling index price toward high open interest pin strikes.
Analyze Live NIFTY Charm Exposure (CEX) Breakdown
Monitor real-time strike-level Charm decay exposure (in ā¹ Cr) and dealer time-decay rehedging direction across active expiries.
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