WINDERMERE, Fla. ( Stockpickr) -- One way to make a ton of profits in a very short-time frame is to take advantage of a stock that experiences a large earnings-related short squeeze.
Short-sellers fear being caught short when a company produces earnings that Wall Street loves, which can cause a gigantic short squeezes to develop as the bears quickly throw in the towel to cover their positions and avoid losing lots of money. Even the best short-sellers know that it's never a good idea to stay short once a big short-covering rally materializes.
This is precisely why I search the market for heavily shorted stocks that are about to report earnings. You only need to find a couple of them in a year to help enhance your portfolio returns -- the gains become so outsized in such a short timeframe that your profits add up quickly.
That said, let's not forget that stocks are heavily shorted for a reason, so it's important to use trading discipline and sound money management when playing earnings short-squeeze candidates. First, don't ever bet any amount of money that will cause you to lose sleep at night. Keep your bets reasonable and only use risk capital, or capital you have designated for speculating with. Also, cut your losses fast when you're wrong, and don't be afraid to take the other side of the trade if things don't set up right. The goal is to capture as much volatility as you can in a very short timeframe.Related: 6 Stocks With Big Insider Activity Remember, you can wait until after the report to trade the stock so you have a better idea of what the trend is. That said, you can miss a lot of the gains if a stock gaps big to the upside or downside right after an earnings report, so trade these plays in the style that you're most comfortable with. Here's a look at a number of stocks that could experience big short squeezes when they report earnings this week.