how are options priced 
an option s price is the sum of its intrinsic value which is the difference between the underlying asset s price and the option s strike price and time value which is directly related to the time left until that option s expiry an option s price is determined using mathematical models like the well known black scholes merton model after inputting the strike price of an option the cost of the underlying instrument time to expiration risk free rate and volatility this model will spit out the option s fair market value 7the bottom linein options trading put call parity defines the relationship between the price of a european call option and a european put option with the same strike price and expiration date when both options are written on the same underlying asset this principle states that the value of a portfolio consisting of a long position in a call option and a short position in a put option should be equal to the value of a single forward contract with the same strike price and expiration date if the prices of the call and put options diverge from the put call parity relationship an arbitrage opportunity may exist however given today s algorithmic trading these arbitrage opportunities are rare 