Chartered Market Technician (CMT) Practice Exam 2025 – Your All-in-One Guide to Exam Success!

The main purpose of the concept of Put-Call Parity is to establish a relationship between the prices of European put options and European call options that have the same strike price and expiration date. This relationship allows traders to create synthetic positions in the market, which can either mitigate risk or exploit arbitrage opportunities.

Put-Call Parity provides the framework for understanding how puts and calls are interconnected. When applied correctly, it can be used to create a hedged position by combining puts and calls. For example, by holding a long position in a stock and buying a put option while simultaneously selling a call option, an investor can protect against potential losses while still participating in upward price movements of the underlying asset.

Other options presented focus on different aspects of trading or investment strategies. Hedging against market fluctuations typically involves various derivatives or investment approaches, not solely the interplay of puts and calls. Calculating dividends from stocks relates specifically to fundamental analysis rather than option pricing. Analyzing stock market trends is an entirely separate analytical practice that does not directly involve the relationship established by Put-Call Parity. Thus, the focus on mitigating risk through a combination of puts and calls underlines the essence of the concept.