Before revision:  The derivation of the pricing rule is developed in such a way as to generalize intuitive real option considerations to continuous state step-by-step. We also discuss some required mathematical finance machinery as wellas results of Breeden-Litzenberger type .
After revision:  The derivation of the pricing rule arising in this way are investigated here. This gives rise to a novel way of estimating state price density. Our approach has some tangible benefits: its principle is transparent, and it is easy to implement numerically while avoiding many issues typically involved in such an estimation. As an application, it is shown how this method can be used in performing kurtosis corrections to the standard Black-Scholes-Merton model by a mixture of several types of distributions. In fact, the technique is non-parametric in nature, and it can handle in principle any physical distribution, e.g., a multimodal one. Some other interesting applications are discussed as well .