In part one, we laid out the mathematical foundations of Charm, and we learned that it is a second derivative of the Black Scholes Model. It measures how delta changes as time passes. Today, we use that understanding to see how we can implement this metric into our trading. First, we learn that Charm expands as you move further OTM, which leads to faster rates of delta decay for these options. This makes intuitive sense, as these options will have lower and lower probabilities of expiring ITM as time moves forward, and the further OTM the option is, the faster this probability will approach zero.
But second, we lean on the work done by the research team in early 2017. The team did an Options Jive segment that demonstrated how Short Strangles could be managed at 50% more quickly than Short Straddles at 25%. This result is the direct result of higher Charm values for the Short Strangles relative to the Short Straddles. The tradeoff, however, is that Short Strangles collect lower credits than Short Straddles. So, one trader might prefer the quicker turnaround on the Short Strangles, while another might opt for the higher credits and bigger wins found in the Short Straddles.
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