Options and the Gamma Knife

Abstract

The author, a co-author of Stephen A. Ross, surveys the work of Ross, and of Douglas Breeden and Robert Litzenberger, that first showed how to use options to synthesize more complex securities. Their results made it possible to infer the risk-neutral measure associated with a traded asset and underpinned the development of the VIX index. Ross’s other main result, which shows how to infer joint risk-neutral distributions from option prices, has been much less influential. The author explains why and proposes an alternative approach to the problem.