Beyond delta and gamma, dealers must also rebalance their hedges when implied volatility changes (vanna) and as time passes (charm). These flows can move markets even when price is flat.
Most traders learn about delta and gamma. But dealer hedging doesn't stop there. Two more "Greeks" create significant market flows that are completely independent of price movement: vanna (driven by changes in implied volatility) and charm (driven by the passage of time).
These effects are particularly powerful around options expirations and during vol regime transitions — precisely the times when traders often find themselves surprised by market behavior that doesn't match the price action.
Vanna measures how much an option's delta changes when implied volatility (IV) moves. It's the cross-Greek between delta and vega.
When IV rises, out-of-the-money options gain more delta — they become more likely to end up in the money. This forces dealers to buy more of the underlying to maintain their delta hedge. Conversely, when IV falls (vol crush), OTM options lose delta, and dealers sell the shares they no longer need to hedge.
Vanna flow rule: Rising IV → dealer buying (supportive). Falling IV → dealer selling (headwind). This is why markets often rally as vol spikes and sell off when vol crushes — dealer flows amplify the move.
The magnitude of vanna flows depends on where the current price sits relative to the options strike distribution. Maximum vanna sensitivity occurs when price is near the highest concentration of OTM options.
Charm (also called delta decay) measures how much an option's delta changes as time passes, with all else equal. As expiration approaches, OTM options lose delta (they become less likely to end up in the money), while deep ITM options gain delta (they become nearly certain to expire in the money).
This continuous drift in delta forces continuous hedging adjustments, even on days with no significant price movement. The hedging effect of charm tends to be directional and predictable:
Monthly options expiration (OPEX) — typically the third Friday of each month — is when vanna and charm effects are most intense. In the week leading up to OPEX, charm flows accelerate as time value decays rapidly. On OPEX itself, a large portion of outstanding GEX expires simultaneously.
The post-OPEX period (the week after expiration) often sees a structural shift in market behavior. The GEX that was pinning price at certain strikes disappears, and the market can move more freely — for better or worse. Historically, the week after OPEX tends to have higher realized volatility than the week before.
One of the most consistent vanna-driven patterns occurs after major events — earnings, Fed meetings, CPI prints. Before the event, IV rises as traders buy options for protection or speculation. Dealers hedge this increased delta exposure by buying the underlying. After the event, IV collapses (vol crush), delta drops, and dealers unwind their hedges by selling. This selling can occur even when the event outcome was positive for the stock — confusing traders who expect a rally.
This is why stocks sometimes fall immediately after positive earnings: the vol crush unwinds dealer hedges that were supporting the price going into the number.
GEX (driven by gamma) tells you the static hedging environment. Vanna and charm tell you the directional flows that will occur as conditions change. Together they give a more complete picture: