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Parity

An option trading at exactly its intrinsic value, with no time value left; the floor for an in-the-money contract.

A deep in-the-money option eventually trades at parity: its price equals the intrinsic-value and nothing more. At that point it behaves like 100 shares, with delta near 1.00 and theta near zero.

Parity is the trigger condition traders watch for early-exercise. Once extrinsic value is gone, holding the option instead of the stock gains you nothing, and exercising may gain you a dividend or interest.

Example: XYZ at $80, and the $50 call quotes 30.00 / 30.10. Intrinsic is $30.00, so the bid is at parity. Anyone short that call should assume assignment is likely, especially before an ex-dividend date, because the holder gives up nothing by exercising.

Related: intrinsic-value, early-exercise, dividend-risk

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.
How an option's time value decaysA curve sliding gently downward at first and then dropping steeply into expiry, where it reaches zero.Extrinsic (time) value6420906030Value bleeds away slowly at firstDecay speeds up hereWorth nothing at expiryexpiryDays to expiry
Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.

Educational only, not advice. Spotted an error? Post in Site Feedback.