Delta does not change only with price. Two second-order sensitivities, vanna and charm, describe how delta changes with implied volatility and with time, and both can create hedging activity even when the underlying has not moved.
01Vanna
Vanna measures how an option’s delta changes as implied volatility changes. When implied volatility falls, out-of-the-money options lose delta, and dealers hedging those positions may need to adjust, buying or selling the underlying without any move in its price. The direction of that adjustment depends on what dealers hold.
02Charm
Charm, sometimes called delta decay, measures how delta changes as time passes. As expiry approaches, out-of-the-money options lose delta and in-the-money options move towards a delta of one. Hedges built against those deltas are adjusted accordingly, which can produce recognisable flows around expiries.
Hedging flows can arise from the passage of time alone.
03Interpreting these flows
Like all positioning-based analysis, vanna and charm effects depend on assumptions about who holds which options, and they compete with every other source of order flow. They are most useful for understanding why markets sometimes behave differently around expiries or shifts in volatility, not as standalone signals.
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