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Appendix c
PUT-cALL PArITy
Before the Black-Scholes-Merton model (BSM), there was no way to 
directly calculate the value of an option, but there was a way to triangulate 
put and call prices as long as one had three pieces of data:
1. The stock’s price
2. The risk-free rate
3. The price of a call option to figure the fair price of the put, and vice 
versa
In other words, if you know the price of either the put or a call, as long 
as you know the stock price and the risk-free rate, you can work out the 
price of the other option. These four prices are all related by a specific rule 
termed put-call parity.
Put-call parity is only applicable to European options, so it is not ter-
ribly important to stock option investors most of the time. The one time it 
becomes useful is when thinking about whether to exercise early in order 
to receive a stock dividend—and that discussion is a bit more technical. I’ll 
delve into those technical details in a moment, but first, let’s look at the big 
picture. Using the intelligent option investor’s graphic format employed in 
this book, the big picture is laughably trivial.
Direct your attention to the following diagrams. What is the differ -
ence between the two?