Aggressive Stock-Picking, Week 5: How to Squeeze the Shorts

Editor's note: The Aggressive Stock-Picking Training Program is a series of six weekly assignments. To start with Week 1, click here. Each assignment is based on one of James Altucher's strategies in his book, Trade Like a Hedge Fund. To get a copy of the book, click here.

This assignment was written by Stockpickr member Ira Krakow.

Many professional traders make their money shorting stocks, betting they will go down. Shorting a stock involves borrowing the stock from a broker, creating a short position . The trader can only recognize a profit if, after the stock has decreased in price, the position is closed by buying the stock on the open market (see "Ask TheStreet: Short Squeeze"). This is called short-covering.

Another statistic to measure the potential intensity of a "short squeeze" (a rising shorted stock forcing buyers to rush in and buy the stock) is days to cover -- the number of days a short-sellers needs to buy back shares to close their positions. The greater the number of days to cover, the more intense the short squeeze can be.

The short ratio is the percentage of a stock that is shorted (see short interest ). One of the best ways to find a short-term trade is to look for a stock that has a high short ratio, say 10% or more. Here's why: The higher the short ratio, the more days it'll take short investors to cover their bearish bets should the stock rise from a jolt of good news.

A heavily shorted stock has the potential to soar on any positive catalyst, because so many investors are placing bets against it. This creates an opportunity for aggressive buying -- in other words, betting against the "shorts" that the stock will experience a short squeeze.

The Stockpickr editors are always on the lookout for those 10 stocks that are the best short squeeze candidates. As an example, Check out the short squeeze candidates for the week of August 25, 2007.