The Put-Call parity is a financial concept which defines the relationship between a call option and a put option, both with identical exercise prices and expiry dates. The concept says that, given the conditions above, the return from holding either:
- A call option and cash
- A put option and the underlying asset
will be exactly the same, otherwise there would be possibilities for arbitrage.
If the put-call parity is NOT true, then there is an opportunity for riskless profit and the differences will be eliminated in an efficient market.