Definition
Put-Call Parity
Put-call parity is the pricing relationship that links the prices of a call, a put, the underlying, and the strike at the same expiry.
It states that a call minus a put at the same strike and expiry equals the underlying price minus the present value of the strike. This equality must hold, or an arbitrage opportunity appears — and it is the basis of synthetic positions, since a call plus a short put replicates a long underlying.
NSE arbitrageurs use put-call parity to spot and exploit mispricings between options and futures on Nifty and stocks, and traders use it to construct synthetic longs and shorts when those are cheaper than the direct position. Any persistent violation is quickly traded away.
Related terms
- Synthetic LongA synthetic long replicates owning the underlying by buying a call and selling a put at the same strike.
- Synthetic ShortA synthetic short replicates short-selling the underlying by selling a call and buying a put at the same strike.
- Cash-and-Carry ArbitrageCash-and-carry arbitrage profits from a futures premium by buying the stock in cash and selling its future simultaneously.
- Box SpreadA box spread combines a bull call spread and a bear put spread at the same strikes to create a near risk-free, fixed payoff.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.