What Is the “Put-Call Parity” and How Does It Relate to Arbitrage?
Put-call parity is a principle that defines the relationship between the price of a European call option, a European put option, the underlying asset's price, and a risk-free bond. It states that a portfolio of a long call and a short put should equal a long position in the underlying asset and a short position in a zero-coupon bond.
If this relationship is violated, an arbitrage opportunity exists, allowing a trader to profit by simultaneously trading the mispriced components.
Glossar
Arbitrage Opportunity
Discrepancy ⎊ An arbitrage opportunity in cryptocurrency, options, or derivatives arises from temporary price imbalances across different markets or forms of the same asset, representing a risk-free profit potential.
Parity
Equivalence ⎊ ⎊ Parity, within financial markets, fundamentally represents a state of equality between two or more assets, rates, or pricing models, often serving as a benchmark for arbitrage opportunities or risk-neutral valuation.
Put-Call Parity
Relationship ⎊ Put-call parity describes a fundamental relationship between the price of a European call option, a European put option, and the underlying asset price, assuming they share the same strike price and expiration date.