Vanna and charm: the two flows you never see coming

Gamma is the main engine, but there are two more, quieter ones, that explain moves the order book alone does not justify. They deserve some attention, because their direction depends on what the market makers carry.

Vanna: the delta that moves with volatility

Vanna measures how much delta changes when implied volatility moves. An out-of-the-money option has a small delta; if volatility rises, extreme scenarios become more likely and its delta grows in absolute value. If volatility falls, it shrinks.

Take the market makers' typical position: short out-of-the-money puts, hedged by selling ES.

• Volatility falls (quiet day, VIX deflating): the puts' delta gets closer to zero, the market maker carries less positive delta, he buys back part of his ES. That is a slow buying flow, without news. The famous "it goes up for no reason" of quiet afternoons.
• Volatility rises (shock, news, stress): the puts' delta deepens, the market maker has to sell more ES. A selling flow that adds to the decline which drove volatility up. A second layer of self-feeding.