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Cramer's 'Mad Money' Recap: Short-Squeeze Seize

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Jim Cramer introduced a new game with new rules on his "Mad Money" TV show Tuesday, called short-busting.

The shorts are the people who bet against a stock, and short-busting is betting that the shorts are wrong, he explained. In a heavily shorted stock, when all shorts try to cover their shares at once, we call it a short squeeze, which causes the stock to jump.

That's where short-busters make money, Cramer said.

If you're going to ride the short bust, you must eye the stock's average daily volume, which reveals how hard it would be for shorts to close or cover their positions, he said. And if the shorts are deep, they'll drive up the price to get out with profits.

Another important factor to look at is the insider buying of a shorted stock because a big shareholder buy lets people know that things are OK enough for them to join the crowd, Cramer continued.

Though Cramer, when at his hedge fund, used to short stocks all the time, he still worried about losing money.

However, now that James Altucher, a contributor to RealMoney.com, "has gotten systematic about the whole thing" and taken these two key metrics and put them to work on TheStreet.com's Stockpickr service, Cramer said he has two short-buster stocks that stick out in the mechanics and on their own merits.

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