Betting on the Likelihood of a Short Squeeze

62 Pages Posted: 16 Aug 2019 Last revised: 21 Feb 2022

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


A growing body of literature argues that skewness-seeking is an optimal investment strategy under plausible conditions. Yet, the difficulty of estimating skewness leads many investors in this category to look for proxies, some of which have also been documented in previous work. In this paper we show that indicators of possible short squeezes provide another such proxy and motivate skewness-seeking investors to buy call options --preferred to the stock for this purpose, as also shown in the literature. The baseline analysis uses a novel measure of possible --yet low probability-- short squeezes in the near term, and the main result is corroborated using standard information related to short interest. As in similar instances, investors 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, Options

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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