Unit 2 · Level 1 · Pricing intuition
Two sides of one coin
There's a beautiful piece of symmetry hiding in options. Own a stock and buy a protective put: below the strike you're floored, above it the upside is yours. Now look at a call sitting on a pile of safe cash: same floor, same upside. Two different constructions, one identical payoff. Their prices must stay locked together. That link is called put-call parity.
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What you get asked
Owning stock plus a protective put has a payoff most like…
Both give a hard floor with full upside above the strike. Same payoff, same price: otherwise free money would sit on the table.
Follow the logic that links puts to calls.
Once you see that stock + put draws the same picture as a call + cash, the parity between calls and puts stops being mysterious.
Same strike, same expiry: call and put prices are tied together by put-call ___.
Parity is an arbitrage relationship, not a rule of thumb. If it breaks, riskless profit appears, and traders pounce until it's restored.
Suppose calls became far too expensive relative to puts. What would happen?
Sell the rich call, replicate it with stock and a put, pocket the difference risk-free. Enough traders doing that snaps prices back into line.
The practical lesson of put-call symmetry?
There's no back door: if calls look expensive because IV is high, the puts are expensive too. One volatility, priced into both sides of the chain. 🐜
The rest of this unit
Intrinsic, extrinsic, theta and IV: what a premium is really made of.