SFI Professor Paul Schneider from the Università della Svizzera Italiana developed a framework in which he takes quoted bid–ask spreads in the liquid S&P 500 options market as input and investigates how different subjective views imply risk preferences, and consequently trading strategies. In his model, the options market is populated by optimists, pessimists, and pragmatists. The optimist believes in the exceptional upside potential of the market, while the pessimist believes disaster is highly likely; the pragmatist believes that the market does not quote a certain region of option strikes by accident and hence considers it the most informative.

Prof. Schneider finds that these three types of agent use a surprisingly small variety of strategies and that pessimists are far and away the most successful agents, with optimists being their unfortunate counterparties. Perhaps surprisingly, the pessimist’s success is based upon his or her role as insurance vendor. Dr. Michael Markovich of Credit Suisse extends the discussion with a reference to optimism in the equity and bond market, and explains how to profit from optimism.  

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