What Is the Concept of ‘Put-Call Parity’ and Does It Hold for American Options?

Put-call parity is a fundamental principle that links the prices of a European call option, a European put option, the underlying asset, and a risk-free bond, assuming the same strike price and expiration. It is a no-arbitrage relationship.

However, put-call parity does not strictly hold for American options because of the early exercise feature. The flexibility to exercise early introduces an inequality rather than a precise equality.