Put-call parity is an important concept in options pricing which shows how the prices of puts, calls, and the underlying asset must be consistent with one another. This equation establishes a relationship between the price of a call and put option which have the same underlying asset. For this relationship to work, the call and put option must have an identical expiration date and strike price.

The put-call parity relationship shows that a portfolio consisting of a long call option and a short put option should be equal to a forward contract with the same underlying asset, expiration, and strike price. This equation can be rearranged to show several alternative ways of viewing this relationship.

Support for this pricing relationship is based upon the argument that arbitrage opportunities would materialize if there is a divergence between the value of calls and puts. Arbitrageurs would come in to make profitable, riskless trades until the put-call parity is restored.

vani Patilanswered.