Put-call parity
The strict relationship between the prices of a call and a put sharing one strike and one expiry.
Formula
C - P = S - K \cdot e^{-rt}C and P are the call and put premiums, S the price of the asset, K the strike, r the rate and t the time to expiry. The relationship is written for European options.
How to read the number
It follows that a call, a put, the underlying and cash are four ways of assembling the same position, and the price of any one of them follows from the other three.
When the metric lies
A broken parity is not free money: collateral, commissions and the impossibility of borrowing the underlying for a short sale all stand between the gap and anyone trying to close it.
Also known as: parity relationship