Put-Call Parity and Arbitrage Opportunity
- Topics:
- Dividends
- Tags:
- Arbitrage,
- Financial Services,
- Investopedia,
- Marketing,
- Marketing Research,
- Parity,
- Pricing,
- Pricing Strategy,
- Strike Price
- Source:
- Investopedia
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Overview: An important principle in options pricing is called put-call parity. It says that the value of a call option at one strike price implies a certain fair value for the corresponding put, and vice versa. The argument for this pricing relationship relies on the arbitrage opportunity that results if there is divergence between the value of calls and puts with the same strike price and expiration date. Arbitrageurs would step in to make profitable, risk-free trades until the departure from put-call parity is eliminated. Knowing how these trades work can give one a better feel for how put options, call options and the underlying stock are all interrelated.
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Format: HTML | Date: Jan 2005 | Pages: 4
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