Put-Call Parity, the hidden link between every call and put
Why a call plus a bond equals a put plus a share, the parity equation, and the riskless arbitrage when it breaks. European options only.
A 2.5 minute animated lesson on put-call parity, the no-arbitrage relationship that ties European calls and puts on the same stock to the spot price and a bond. Built for FIN301 and ECON3003 students at Western Sydney University, and useful for anyone meeting option pricing for the first time.
The video builds two portfolios that look different but pay exactly the same at expiry. A call plus a bond worth the strike, and a put plus one share, both deliver the larger of the stock price and the strike. Because the payoffs are identical in every scenario, the law of one price forces the two portfolios to the same cost today, which is the parity equation C + K e^(-rT) = P + S0. A worked example prices a fair put at A$2.56, then shows how a A$1.00 mispricing opens a riskless arbitrage.
The lesson closes on the catch that trips students up. The equality holds for European options only. American options give an inequality, and dividends shift the spot term down. Pair the video with the Atlas concept page for the full derivation, a quick quiz, and citations to Hull (2022), Stoll (1969), and Merton (1973).