The Options Industry Council (OIC) - Put/Call Parity

Parity option,

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Individuals trading options should familiarize themselves with a common options principle, known as put-call parity. Put-call parity defines the relationship parity option calls, puts and the underlying futures contract.

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This principle requires that the puts and calls are the same strike, same expiration and have the same underlying futures contract. The put call relationship is highly correlated, so if put call parity is violated, an arbitrage opportunity exists.

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If this is not the case, an arbitrage opportunity exists. For example, if the futures price is minus the call price of 5, plus the put price of 10 minus the strike equals zero.

parity option

Say parity option futures increase to and the call goes up to 6. The put price must go down to 8. Now say the future increases to and the call price increases to 7. The put price must go down to 7.

CFA Online Video Tutorial: Option Contracts:Put Call Parity

As we originally said, if futures are atthe call price is 5 and the put price is If the futures fall to If a put or call does not adjust in accordance with the other variables in the put-call parity formula, an arbitrage opportunity exists. Consider a call priced parity option 2, the underlying future is at so the put price should be 7.

parity option

If you could sell the put at 8 and simultaneously buy the call for 2, along with selling the futures contract atyou could benefit from the lack of parity between the put, call and future. Market Outcomes Look at different market outcomes demonstrating that this position allows individuals to profit parity option options signals demo account regardless of where the underlying market finishes.

parity option

The futures price finished below at expiration. Our short put is now in-the-money and will be exercised, which means we are obligated to buy a futures contract at from the put owner. Another scenario, the futures price finished parity option at expiration.

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Our long call is now in-the-money allowing us to exercise the call and buy a futures contract at If the futures end exactly atboth options expire worthless. We stated earlier that put-call parity would require the put to be priced at 7. Put-call parity keeps the prices of calls, puts and futures consistent with one another.

parity option

Thus, improving market efficiency for trading participants.