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Mechanics
Parity (Option) — Options Trading Term Explained
Parity (Option) Explained — definition, how it is measured, and why it matters for options research decisions.
By Aigars VolRadar·
An option whose market premium equals its intrinsic value with zero time value remaining. Typically a deep in-the-money contract near expiration that trades at its assignment value, leaving no extrinsic premium to decay.
Key takeaway
An option at parity is 100% intrinsic — no time premium left. It behaves exactly like stock. If you see an option 'below parity,' there's an arbitrage (or it's illiquid with a stale quote).
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Why It Matters
Parity is a practical signal that an option has effectively become a stock substitute with $100 notional per contract. Holders of parity calls face higher early-assignment risk, especially into an ex-dividend date, because the short side has no incentive to hold and the long side captures the dividend by exercising. For traders closing deep ITM positions, parity quotes mean any adverse price move flows 1:1 through the option, so the bid-ask spread becomes the main transaction cost rather than a volatility premium. Parity also marks a pricing floor: quotes below intrinsic value create immediate arbitrage via exercise, so market makers bid at or slightly above parity.
How It Works
An option's premium equals intrinsic value plus extrinsic time value. When time value collapses to zero, the option trades at parity. Parity-option vs deep-in-the-money: parity is a pricing state where extrinsic equals zero, while deep ITM describes the strike-to-spot relationship that typically produces parity near expiration. Conditions favoring parity include very high delta (approaching 1.00), minimal time to expiration, low implied volatility, and for calls, an upcoming dividend that pulls extrinsic value toward zero. A parity-priced long call or put can be exercised to lock in intrinsic value, though selling the option at parity avoids the exercise and settlement steps entirely.
Frequently Asked Questions
What is Parity (Option)?
An option whose market premium equals its intrinsic value with zero time value remaining. Typically a deep in-the-money contract near expiration that trades at its assignment value, leaving no extrinsic premium to decay.
Why does Parity (Option) matter for premium sellers?
An option at parity is 100% intrinsic — no time premium left. It behaves exactly like stock. If you see an option 'below parity,' there's an arbitrage (or it's illiquid with a stale quote).
How does Parity (Option) work?
An option's premium equals intrinsic value plus extrinsic time value. When time value collapses to zero, the option trades at parity. Parity-option vs deep-in-the-money: parity is a pricing state where extrinsic equals zero, while deep ITM describes the strike-to-spot relationship that typically produces parity near expiration. Conditions favoring parity include very high delta (approaching 1.00), minimal time to expiration, low implied volatility, and for calls, an upcoming dividend that pulls extrinsic value toward zero. A parity-priced long call or put can be exercised to lock in intrinsic value, though selling the option at parity avoids the exercise and settlement steps entirely.
Related Terms
60/40 Tax Treatment
The favorable capital gains split applied to Section 1256 contracts where 60% of gains are taxed at the long-term rate and 40% at the short-term rate, regard...
Adjusted Option
An adjusted option is a listed contract whose terms — strike, multiplier, or deliverable — were modified by the OCC following a corporate action such as a st...
All-or-None Order
An all-or-none (AON) order is a time-in-force modifier requiring the entire order quantity to execute as a single transaction with no partial fills.
American-Style Option
An option contract that can be exercised by the holder at any time from purchase through expiration.
The information about Parity (Option) above is for educational purposes only and is not financial advice. Read our full investment disclaimer.
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