To parlay is (1) to place a bet as part of a series of bets using cumulative winnings; (2) more simply, just to bet; or (3) to maneuver something of advantage to receive something else of much greater value. To parley is to have a discussion, especially one between enemies or opposing sides. Both words also have corresponding noun senses: a parlay is a bet, and a parley is a discussion.
The two are not quite homophones (parlay is pronounced par-LAY; parley is PAR-lee), but they are often confused because they are one letter apart, sound similar, and are both rare. Despite their similarity, they are etymologically unrelated. Parlay, which is a mostly American word, comes from the earlier gaming term paroli, which has French and Italian origins.1 Parley comes from French, where the verb parler means to speak.2
Parlay is inflected parlayed and parlaying, and it usually takes the preposition into—that is, one parlays an advantage into a greater advantage. Parley is inflected parleyed and parleying.
Mr. Bulger parlayed the assignment into a movie deal and a return visit to the monster’s den. [New York Times]
Solomon’s son and successor parleyed with them, but he bungled the discussions. [The Human Story, James C. Davis]
On the other hand, what is a chap to do with all the recognition, if not parlay it into lucrative celebrity? [Telegraph]
Nehemiah’s enemies then tried (ch.6:l-4) to lure him from the city, ostensibly for a parley but actually with the intention of murdering him. [A History of Israel, John Bright]
When it comes to marketing, parlaying coverage means doing the work once and getting two or more pieces of publicity out of it. [The Everything Guide to Getting Published, Randy Landenheim-Gil]
And its members, announced by Mr Karzai, include many longtime enemies of the Taliban with whom they may refuse to parley. [Economist]