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 terribly important to stock option investors most of ...