What does the term "at parity" refer to in options trading?

The term "at parity" in options trading indicates that the premium of an option is equal to its intrinsic value. Intrinsic value is defined as the difference between the current price of the underlying asset and the strike price of the option, for in-the-money options. When an option is at parity, it means that the option is reflecting its true market value, without any extrinsic or time value. This typically occurs when the underlying asset's price is equal to the strike price for a call or a put option at expiration.

In essence, when an option is at parity, the market perception aligns precisely with the option's intrinsic worth, meaning that there is no extra premium being paid for time or volatility expectations. This makes the option's pricing straightforward and can lead to potential trading strategies that utilize this parity condition. Understanding this concept is crucial for evaluating options and considering trading positions based on real market values.