put-call parity states: C - P = S - K·e^(-rT)

Ever wondered how options and futures can be linked?

Imagine you're betting on the price of gold in a month. You can't just buy gold now; you need a way to bet on its price later.

Think of it like this: if you want to bet on gold's price rising, you buy a call option. If you bet on gold falling, you buy a put option. Put-call parity shows that holding a call and shorting a put is like owning a gold contract for the future.

Example

If you buy a call option for 50 and short a put option for 50, it's like you have a contract to buy gold at $50 next month.

Remember this

Put-call parity (C - P = S - K·e^(-rT)) ensures you can compare options and futures effectively.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

Related concepts

the Black-Scholes formula prices

How do you price a gamble on a stock's future price?

Greeks (finance)

Greeks measure sensitivity of option prices to underlying parameters

Black–Scholes model

How can you predict the price of an option?

Real options valuation

Why can't we always predict the future in business?

Financial economics

Ever wondered how traders price options without guessing?

Write the Black-Scholes formula for a European call option: C = S·N(d₁) - K·e^(-rT)·N(d₂)

C = S·N(d₁) - K·e^(-rT)·N(d₂)

Educational content, not financial advice.

Swipe through more Finance concepts

Open Pocket Polymath