Put-call parity
TheoryDefinition
No-arbitrage relationship between European call and put options on the same underlying with the same strike and expiration: C − P = S − K × e^(−rT). Implies you can synthesize any one of stock/call/put from the other two.
If put-call parity is violated, arbitrage opportunities exist (rare in liquid markets thanks to HFT). Used to value warrants, convertibles, and complex derivatives.
If put-call parity is violated, arbitrage opportunities exist (rare in liquid markets thanks to HFT). Used to value warrants, convertibles, and complex derivatives.
Formula
Long stock = long call + short put + short bond