288  •   The Intelligent Option Investor
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5/18/2012 5/20/2013
40
60
80
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120Stock Price
140
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180
200
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20
5/18/2012 5/20/2013
40
60
80
100
120Stock Price
140
160
180
200
GREENGREEN
REDRED
If you say, “Nothing, ” you are practically right but technically 
wrong. The image on the left is actually the risk-reward profile of a pur -
chased call option struck at $50 paired with a sold put option struck at 
$50. The image on the right is the risk-reward profile of a stock trading 
at $50 per share.
This simple comparison is the essence of put-call parity. The parity  
part of put-call parity just means that accepting downside exposure by sell-
ing a put while gaining upside exposure by buying a call is basically the 
same thing as accepting downside exposure and gaining upside exposure 
by buying a stock.
What did I say? It is laughably trivial. Now let’s delve into the details 
of how the put-call parity relationship can be used to help decide whether 
to exercise a call option or not (or whether the call option you sold is likely 
to be exercised or not).
Dividend Arbitrage and Put-call Parity
Any time you see the word arbitrage , the first thing that should jump to 
mind is “small differences. ” Arbitrage is the science of observing small dif-
ferences between two prices that should be the same (e.g., the price of IBM