Are you thinking what is options trading and put-call parity? There are many people who don’t know about this concept. When people hear the word investment, they of investing in stocks in the stock market. The most common strategy is buying stocks and holding on the stocks for long period for getting a reward. Though this is the most sensible way of investment, you will need a broker to advise about the stocks.
In recent times, when it comes to investment, options trading is gaining popularity. In simple words, options trading is buying and selling of options contracts. These contracts are sold on public exchanges; an important thing to keep in mind is that it similar to stock trading.
In options trading, the traders generate profits by buying options contract. They sell the options contract at a higher price. Just like the stock traders, options traders can have a short position on the contracts they assume will be devalued.
However, in practice, it is more flexible in comparison to the stock trading. There is a broad range of underlying securities when it comes to deciding where to invest. The traders are capable of using options to speculate the price movement and provide better opportunities for making profits.
In this, both rewards and risks can be high and there are plenty of options. It is not an easy task, this is because there are numerous costly mistakes that you can make. This is the reason why you need to know everything before investing.
Someone who is interested in the options market needs to understand the concept of put-call parity. There are two components of the options theory, put and call. Hans Stoll introduced the put-call parity concept in 1969. According to this theory, the premium of a call option suggests a fair price for the put option. While the expiration date and strike price are the same.
In this article, we have highlighted everything there is to know. Have a look!
What is Put Call Parity?
Put Call Parity is a basic concept in options trading. With the help of this theory, options traders can determine the price of the option contracts. It will help you value a put or a call depending on other components. In simple words, put-call parity is a position where the long call and short put is equal to the value of the stock.
There are 3 crucial factors, call and put options, and underlying. According to the put-call parity concept, when any one option is selected, they should be equivalent to the third factor. In case the components are not equal to the third component, this indicates that there is a mispricing. Along with this, the opportunities of arbitrage is present.
Therefore, this is a beneficial concept as it a great guide for valuing the options contract. This is only possible if the options are compared to its complimentary call, put or any underlying instrument.