Cem Karsan Vanna & Charm: The Extraordinary Story

Cem Karsan Vanna: The financial industry doesn’t usually have the legendary origin stories that Silicon Valley companies are famous for. Everyone knows that Apple (AAPL) got its start in Steve Jobs’ garage, and Mark Zuckerberg launched Facebook (FB) from his dorm room at Harvard University in dramatic fashion. Google founders Larry Page and Sergey Brin created their first search algorithm while they were students at Stanford University – an elegant bit of code they called BackRub. 

Market geniuses typically build their careers in a less exciting way – it’s dull work that doesn’t make for appealing screenplays. However, Cem Karsan is an exception to that rule. His approach to trading is unique, and he has inspired an entire movement based on little-known terms: vanna and charm.

Who Is Cem Karsan?

Cem Karsan is a citizen of the world. He was born in London, then spent a portion of his childhood in Turkey. His next stop was the great state of Texas. When his parents moved on to Norway, Karsan stayed in the United States to attend an East Coast prep school. 

Karsan always had a passion for subjects like mathematics, public policy, and economics. More importantly, he had special talent in those areas, which led to his interest in derivatives.

After getting a foundation in mathematics, public policy, and economics at Rice University, Karsan made a beeline for Chicago. By 1998, he was working with S&P 500 equity options. He started to make a name for himself after successfully navigating the dot-com crash. 

In 2003, Karsan was hired at New York’s Bear Wagner. He built a team that took the firm deep into the world of market-making. He decided it was time to launch his own firm in 2006, and he was starting to build a strong client base when the 2008 financial crisis hit. 

During one of the world’s darkest economic moments, Karsan’s firm pioneered new methods of generating returns. His success attracted a lot of attention.

He was one of the few who could still make money during what is now referred to as The Great Recession. In 2010, Karsan decided to stake out new territory, and that meant building another firm: Aegea Capital.

What is Vanna and Charm in Options Trading?

Through Aegea Capital, Cem Karsan focuses on long volatility strategies. That involves buying call or put options to capitalize on increases in market volatility. Specifically, Karsan is interested in volatility as it pertains to the VIX and equity indexes. VIX is the ticker symbol for the CBOE Volatility Index, which measures market volatility expectations up to 30 days out. 

Karsan’s methods rely on the “options Greeks”, or the calculations that can be used to quantify various characteristics of an option. These are referred to as the “Greeks”, because they are represented by Greek letters. There are four “first-order Greeks”: Delta, Vega, Rho, and Theta. 

So-called “second-order Greeks” are additional measures that examine the rate at which “first-order Greeks” are changing. These changes may be caused by any number of things, including interest rate adjustments and price fluctuations.  

Vanna is a second-order Greek that evaluates the relationship between changes in volatility and the price of an option’s underlying asset. Specifically, as those elements change, Vanna predicts the rate at which an option’s Delta and Vega will change. Call options and short put positions have positive Vanna, while put options and short call positions have negative Vanna. 

An option’s Delta measures the rate at which change occurs between the price of an option’s underlying asset and the price of the option itself. An option’s Vega is the rate at which change occurs between the volatility of an option’s underlying asset and the option’s value. 

Charm is a measure of “Delta decay”, which is the rate an option’s delta changes over time. Charm values fall on a spectrum between -1.0 and +1.0. With the help of first-order and second-order Greeks, skilled traders can project changes in the market and manage their portfolios accordingly. That’s a skill Cem Karsan has mastered. 

How Cem Karsan Predicts Stock Market Movements

The CBOE Volatility Index (VIX) is often referred to as the fear index. It purports to measure market sentiment, and in truth, it illustrates how anxious investors are at any given moment.

Higher volatility means bigger moves in the larger market – and the more movement among securities, the more valuable options become. 

Cem Karsan reviews information from multiple sources, including all sorts of global events, then he matches that up with his analysis of current volatility projections. That gives him an edge in predicting what the market will do next, and he uses those forecasts to bet on upcoming stock market movements.

This strategy tends to be somewhat risky, but Karsan is one of the few to develop a near-precise method of anticipating market movements. That’s what makes his story one of the most remarkable in investment history.

Is Cem Karsan Accurate?

Cem Karsan and his team have put unprecedented time into researching historical patterns in volatility. Through that research, he has determined that over the past 40 years, 30-day volatility offers the greatest potential for gains.

Aegea Capital identifies inefficiencies and relative peaks in the 30-day volatility projections, then trades options that profit from those elements. 

The tools and proprietary algorithms Cem Karsan developed are accurate to the point that outsiders are awestruck. To date, no one has been able to duplicate Cem Karsan’s methods with anything close to the same rate of accuracy. 

The team moves quickly as new information comes in. Karsan says that average hold time is approximately 36 hours. Trades are rebalanced more frequently when volatility is high and at a slower rate when volatility is low. The longest stretch between rebalancing is a week, given the speed at which volatility projections change. 

Cem Karsan: Aegea Capital

The beauty of Cem Karsan’s strategy, as executed by Aegea Capital, is that these products are not correlated to other investment products in the market today. That offers investors a solid choice for diversifying their portfolios, and it’s reported that many Aegea clients limit these products to between 5 and 10 percent of total assets.

Aegea is able to generate higher-than-average returns as compared to its peers through identifying and trading on structural mispricing of skew and the implied volatility already present in the structure of index option terms. The team uses its connections within the industry, along with real-time trade information, to move quickly and accurately. This keeps slippage to a minimum. 

Aegea has particularly low turnover, which means fewer expenses to eat away at returns. Finally, Aegea clients are able to keep tax liability low, thanks to the favorable tax treatment granted to index options. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.