This paper shows how to decompose the dollar profit earned from an option into two basic components: 1) mispricing of the option relative to the asset at the time of purchase, and 2) profit from subsequent fortuitous changes or mispricing of the underlying asset. This separation hinges on...

This paper develops a simple technique for valuing European and American derivatives with underlying asset risk-neutral returns which depart from lognormal in terms of prespecified non-zero skewness and greater-than-three kurtosis. Instead of specifying the entire risk-neutral distribution by...

Despite its success, the Black-Scholes formula has become increasingly unreliable over time in the very markets where one would expect it to be most accurate. In addition, attempts by financial economists to extract probabilistic information from option prices have been puny in comparison to...