According to the put-call parity concept, there is a fixed link between the time premium of puts and calls that is determined by the options’ volatility and the risk-free interest rate. The idea is intriguing, but retail traders rarely pay much attention to it because its details can seem complex and impractical — relevant only to theory geeks and floor traders who pay miniscule transaction costs.

But if you understand the simple equation behind put-call parity, it may change the way you trade certain positions. This formula provides flexibility, because it shows there are two ways to create any options position. For example, if you are bullish on a company, you can either buy its stock or buy a call and sell a put simultaneously ("synthetic stock"), which theoretically offers the same risks and rewards — often with a lower capital requirement.

The following four sets of equivalent option positions illustrate how to use put-call parity to find the most practical positions to trade.