I have been trading for a while but often get confused with options theory.
I see the put-call parity formula mentioned in many posts and articles. Most explanations are complex and hard to follow.
Could someone explain it in simple terms? How does it work in real trading situations?
The formula shows buying a call plus selling a put equals owning the stock. When this breaks down, smart money jumps in to profit from the gap.
Here’s how it works: if calls get too expensive compared to puts, buy the cheaper puts and sell the calls - same position. The market fixes these gaps within hours.
Patrick Boyle explains the mechanics well here:
Most retail traders miss this, but it helps you spot mispriced options and avoid overpaying for premium.
Formula: Call + Strike Price = Put + Stock Price. When this breaks down, arbitrage opportunities arise. The market corrects these price gaps quickly.
Put-call parity means calls and puts with the same strike price move together in predictable ways.
I blew $300 on overpriced Apple puts last year when I could’ve bought cheaper calls instead. Knowing this relationship would’ve saved me money.
The formula spots overpriced options so you can make better trades.
Think of it like a seesaw. Call prices go up, put prices drop by the same amount - assuming everything else stays constant.
The formula shows you fair pricing between calls and puts. When one side’s off, there’s usually a trade to make.
Mobile platforms don’t show these gaps much. But knowing this keeps you from overpaying for options that seem cheap but aren’t.
It ensures call and put prices are fair at the same strike price and expiry.