  The objective of this paper is to introduce the theory of option pricing for
markets with informed traders within the framework of dynamic asset pricing
theory. We introduce new models for option pricing for informed traders in
complete markets where we consider traders with information on the stock price
direction and stock return mean. The Black-Scholes-Merton option pricing theory
is extended for markets with informed traders, where price processes are
following continuous-diffusions. By doing so, the discontinuity puzzle in
option pricing is resolved. Using market option data, we estimate the implied
surface of the probability for a stock upturn, the implied mean stock return
surface, and implied trader information intensity surface.
