Put/Call Parity

Put/Call Parity is a principle referring to the static price relationship, given a stock's price, between the prices of European put and call options of the same class (i.e. same underlying, strike price and expiration date).

Put/Call Parity

Put/Call Parity is a principle referring to the static price relationship, given a stock's price, between the prices of European put and call options of the same class (i.e. same underlying, strike price and expiration date).

 


Interpretation of Put/Call Parity

Put/Call Parity refers to the static price relationship between the prices of European put and call options of the same class. This relationship is shown from the fact that combinations of options can create positions that are the same as holding the stock itself. These option and stock positions must all have the same return or an arbitrage opportunity would be available to traders.  

Any option pricing model that produces put and call prices that don't satisfy put-call parity should be rejected as unsound because arbitrage opportunities exist.


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