The relationship between the

price of a call and the price of a put for an

option with the

same characteristics (

strike price,

expiration date, underlying). It is used in

arbitrage theory. If different portfolios comprised of cals and

puts have the same

value at

expiration, it is implied that they will have the same value leading

up to the expiration point. Thus, the

values of the portfolios

move in

lock step.

Portfolio price equality is calculated as c + PV(x) = p + s, where c is the

market value of the call, PV(x) is the

present value of the strike price, p is the market value of the put, and s is the market value of the

underlying security.

If the two sides of the equation are not equal, arbitrage

profit could be gained by

investing in the

less expensive portfolio. Analysis of the

parity relationship assumes that other

factors, such as a

dividend, are not taken into

account.