What is put-call parity?

Put-call parity is a fundamental principle in options pricing that expresses a specific relationship between the prices of European call and put options with the same strike price and expiration date. This concept is essential for arbitrage opportunities and ensuring that the markets are efficiently priced.

Specifically, put-call parity states that the price of a call option minus the price of a put option should equal the price of the underlying asset minus the present value of the exercise price. This relationship ensures that there is no arbitrage opportunity available in a well-functioning market since any significant deviation from this relationship would prompt traders to exploit discrepancies by buying or selling options and the underlying asset.

Understanding put-call parity is crucial for traders, as it helps them assess whether options are fairly valued and aids in the construction of synthetic positions, which may involve combining different types of options to mimic the payoff of a stock or another derivative.

Other options, while relevant to the broader topic of options trading, do not accurately reflect the concept of put-call parity. The difference in strike prices, legal definitions, or strategies for profit maximization do not encapsulate the specific mathematical relationship that defines put-call parity.