Heterogeneous beliefs and the effect of replicatable options on asset prices

We present two ways in which trading in a replicatable option can affect the price process of the underlying asset. In the first situation, trading art option that each investor views as payoff redundant breaks a non-fully revealing equilibrium that exists when the option market is absent. The second situation involves a market that is dynamically complete without options, but in which introducing an option mark:et allows self-confirming conjectures of additional uncertainty about the future price of the underlying asset. Heterogeneous beliefs play important though different roles in both situations.