Betting on the Likelihood of a Short Squeeze
53 Pages Posted: 16 Aug 2019 Last revised: 31 Aug 2021
Date Written: August 13, 2019
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: Suggested Citation