Options and the Gamma Knife

摘要

This article presents a survey of the work of Ross [1976] and Breeden and Litzenberger [1978] 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 Chicago Board Options Exchange Volatility Index (VIX). The other main result of Ross [1976], which shows how to infer joint risk-neutral distributions from option prices, has been much less influential. I explain why and propose an alternative approach to the problem. This article is dedicated to the memory of Steve Ross.