What Is the Concept of “Put-Call Parity”?

Put-call parity is a fundamental principle in options pricing that defines the relationship between the price of a European call option and a European put option with the same strike price and expiration date. It states that a portfolio consisting of a long call and a short put is equivalent to a long position in a forward contract on the underlying asset.

The formula is: Call Price – Put Price = Present Value of (Stock Price – Strike Price). Any deviation from this parity creates an arbitrage opportunity.