You are delta hedged in 500 contracts of a long call on Friday's close. Charm on the position is -0.015 of delta per contract per calendar day. Each contract covers 100 shares. What stock trade does the passage of the weekend alone require on Monday's open?

You are delta hedged in 500 contracts of a long call on Friday's close. Charm on the position is -0.015 of delta per contract per calendar day. Each contract covers 100 shares. What stock trade does the passage of the weekend alone require on Monday's open?

Approach: Charm is the drift of delta with time at fixed spot. Multiply the daily rate by the calendar days and by the share multiplier to get the hedge adjustment.

Sell 2,250 shares. Charm is the rate of delta decay with time at unchanged spot, so three calendar days at -0.015 per contract per day gives a delta change of -0.045 per contract. Across 500 contracts of 100 shares each, the position delta falls by 0.045*500*100 = 2,250 shares, and a hedge that was flat on Friday is now long 2,250 shares too many, so those shares are sold on Monday's open. The sign is what matters on a book: an out-of-the-money option bleeds delta toward zero as time passes while an in-the-money option gains delta toward one, so the same hedge adjustment reverses across the strike. Desks that ignore charm over a long weekend or a holiday period discover it as an unexplained direction bet in the Monday profit and loss, and the effect is largest in the last week before expiry where the calendar days do the most work.

Follow-up: The stock also goes ex-dividend over the weekend. What second adjustment does that force and how does it interact with the charm trade?

Key concepts: charm, delta decay, hedge adjustment, calendar days.