Put-call parity is the fundamental relationship linking the prices of a call, a put, the underlying, and a bond at the same strike — enforced by arbitrage. It keeps option prices consistent.
What it says
Put-call parity states that a call and put at the same strike and expiration are related by a fixed formula involving the underlying price and the strike (discounted). In essence: owning a call and shorting a put (same strike) synthetically equals owning the stock (financed). If prices deviate from this relationship, a risk-free arbitrage exists.
Why it matters
Arbitrageurs enforce parity — if a call is too cheap relative to the put (and stock), they’ll buy the cheap side and sell the rich side risk-free, pushing prices back in line. So parity keeps calls, puts, and the underlying consistent. Deviations usually signal something real (like dividends, hard-to-borrow costs, or rates), not free money.
Put-call parity is the leash that keeps calls and puts tied to the stock. Stray from it and arbitrage yanks prices back, which is why it holds.
The takeaway
Put-call parity is the arbitrage-enforced relationship keeping call, put, and underlying prices consistent. It underpins synthetic positions and conversion/reversal arbitrage. For a scalper it’s deep background, but it’s why option prices “make sense” across calls and puts.
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