Blog Home / Financial Terms / Put-Call Parity

Put-Call Parity

Put-call parity allows investors and risk managers to calculate the price of either put or call if the value of anyone is already provided.

Definition

What is Put Call Parity?

Put-call parity is considered a critical aspect of option pricing. It allows investors and risk managers to calculate the price of either put or call if the value of anyone is already provided. The put-call parity is derived based on two options strategies: a fiduciary call and a protective put.

A fiduciary call combines a zero-coupon bond that pays X at maturity and a call option with an exercise price of X. The payoff for a fiduciary call at expiration is X when the call is out-of-the-money, and X + (S − X) = S when the call is in the money.

Now, let’s discuss the protective put, a combination of stock and a put option on the stock. The expiration date payoff for a protective put is (X − S) + S = X when the put is in-the-money, and S when the put is out-of-the-money.

Example of Put Call Parity:

Put call parity is defined at

p = c − S + PV(X)

Let’s assume a combination of options with a call price of USD 10, a stock price of USD 50 and the present value of a bond is given as USD 90. Given this, we can calculate the price of the put option as below:

P = 10 – 50 + 90 = 50

Owais Siddiqui
1 min read
Related:
Financial TermsCPD
Dow Theory: Understanding the Primary Trend and the Secondary Trend
Sagar Pujari 04 July 2022
Financial TermsFRM
What is Standard Deviation?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Hedging,Types and Importance
Owais Siddiqui 19 September 2022
Financial TermsFRM
What is Hedging?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Variance
Owais Siddiqui 19 September 2022

Shares

Leave a comment

Your email address will not be published. Required fields are marked *