Short Squeeze Uncertainty and Skewness
with Ilias Filippou and Fernando Zapatero.
Short squeezes often lead to sudden, large increases in stock prices. We show that uncertainty about the likelihood of a short squeeze is a proxy for skewness-seeking investors, and they use call options in their quest. In particular, these investors are willing to pay a premium for the upside potential of these lottery-like securities, as is the case for other lottery-like securities identified in the literature. In addition, high short squeeze uncertainty causes deviations from the put–call parity condition in the direction dictated by the overpricing of the call options.