Failed to create a bootable disk image file for this version of macOS.

I am using Parallels Desktop 19.1.1 on a 27" 2019 iMac running Sonoma 14.1.1
This screen recording shows what happens when I try to create a Monterry virtual machine: https://www.screencast.com/t/3G4yN07va0Z
I get the error "Failed to create a bootable disk image file for this version of macOS."
Very similar to https://forum.parallels.com/threads...-image-file-for-this-version-of-macos.355906/
I have tried selecting an external volume on which to create the .iso, but it still fails.

 

So did you solve this? Even now I am having this error, when trying to create Sonoma VM from Sequioa machine