Betting on the Likelihood of a Short Squeeze

53 Pages Posted: 16 Aug 2019 Last revised: 31 Aug 2021

See all articles by Ilias Filippou

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School

Pedro Angel Garcia-Ares

Instituto Tecnológico Autónomo de México (ITAM)

Fernando Zapatero

Questrom School of Business, Boston University

Date Written: August 13, 2019

Abstract


Short squeezes often lead to large increases in stock prices. Using a novel measure of the likelihood of short squeezes we show that it explains lottery or skewness-seeking-investing. As in other instances of securities with right-skewed returns documented in the literature, these investors buy call options instead of the underlying stocks, to maximize the right-skewness of their investment. In particular, they are willing to pay a premium for the upside potential. This type of investment strategy has attracted much attention recently, but we document that it has been used for decades.

Keywords: Short Squeeze, Anomalies, limits to arbitrage

JEL Classification: G11, G12, G14, G32

Suggested Citation

Filippou, Ilias and Garcia-Ares, Pedro Angel and Zapatero, Fernando, Betting on the Likelihood of a Short Squeeze (August 13, 2019). Available at SSRN: https://ssrn.com/abstract= or http://dx.doi.org/10.2139/ssrn.3437085

Ilias Filippou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Pedro Angel Garcia-Ares

Instituto Tecnológico Autónomo de México (ITAM)

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico

Fernando Zapatero

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

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