uploaded image

Using Options Charm To Help Select Strikes

By:Dr. Jim Schultz

Out-of-the-money (OTM) strikes with stronger charms lead to faster delta decay

  • A basic understanding of second-order greeks, such as option charm, can help with both strategy selection and strike selection.
  • While ATM strikes have weaker charms, OTM and ITM strikes have stronger charms.
  • Knowing OTM strikes with stronger charms will lead to faster delta decays could give an edge to pushing your strikes even further OTM on your short premium strategies.

Day-to-day, we use primarily the first-order greeks in our analysis. Specifically, options delta and options theta are key metrics we monitor almost continuously. By focusing on delta, we’re able to gauge the directional bias of our individual positions or in our overall portfolio. By focusing on theta, we measure how much time decay we have working for us and how valuable the passage of time will be toward achieving our objectives.

Going deeper, however, some second-order greeks, like options charm, can also assist in our analysis, even if we don’t use them as practically as we might a delta or theta. Just having an elementary understanding of charm can help with both strategy selection and strike selection.


Options charm: What it is

While delta measures how an option’s price changes when the underlying stock price changes, and theta measures how an option’s price will change when time passes, charm essentially mixes these two variables. As a second derivative of the Black-Scholes options pricing model, charm takes the derivative of the model with respect to price first and then with respect to time second. So, charm shows how quickly or slowly delta itself is changing over time.

Options that are at-the-money (ATM) have weaker charms, or their deltas change less with the passage of time. Options that are out-of-the-money (OTM) or in-the-money (ITM) have stronger charms, or their deltas change more with the passage of time. Naturally, an OTM option’s delta will move closer to zero as time passes, and an ITM option’s delta will move closer to 1 or -1 (depending on what type of option it is) as time passes, and all other things being equal.


Options charm: Why it matters

Just understanding these basic elements of charm can help significantly with both strategy selection and strike selection. For instance, we know it’s effective to sell OTM premium in the form of a short strangle, short put or put ratio spread because of its positive theta and high probability of profit. But now we also know these strategies benefit greatly from the charm effect pushing the strategy’s delta closer to zero with each passing day.

Furthermore, within these strategies, we know that with strike selection there is a tradeoff between credit collected and probability of profit. The further OTM we place our strikes, the higher our probabilities but the lower our credits. However, if we choose strikes that are less OTM, then we can collect more credit, at the expense of lower probabilities.

By adding charm to the mix, we might now give an edge to the further OTM strikes because their deltas decay more rapidly. This accelerated deterioration will naturally drag down extrinsic values more quickly, enabling you to reach your profit targets faster.

Jim Schultz, a quantitative expert and finance Ph.D., has been trading the markets for nearly two decades. He hosts From Theory to Practice, Monday-Friday on tastylive, where he explains theoretical trading concepts and provides a practical application of those concepts to a trading portfolio. @jschultzf3 

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro. 

Trade with a better brokeropen a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies. 


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.

tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on tastylive.com apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.