Graph 1: ITM Charm


Source: www.tradersnectar.com


PRACTICAL APPLICATIONS When trading ITM oil options:


1. Regular Monitoring: Keep a close eye on delta changes, especially over weekends when charm effects can accumulate.


2. Adjustment Thresholds: Consider setting specific delta thresholds for adjusting positions to manage the increasing directional exposure as the option moves deeper ITM.


3. Expiration Management: Be prepared to make more frequent adjustments or consider closing positions as expiration approaches to avoid unwanted exposure to physical oil delivery.


CONCLUSION While ITM oil options exhibit strong charm characteristics, their high directional risk makes them challenging for speculative positions. Traders focusing on selling options may find more favorable risk-reward profiles in OTM options, where strong charm combines with lower directional risk. However, for those engaged in complex hedging strategies or market-making activities, understanding ITM charm remains crucial for effective risk management in the volatile oil futures market.


Anatolios Kazimirov Denmark - CVR: 32081487 (as agent only) E: akazimirov@pangaeals.com M: +45 31 31 34 87


29 | ADMISI - The Ghost In The Machine | Q4 Edition 2024


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