WINDERMERE, Fla. ( Stockpickr) -- Earnings reports have the power to create big volatility in stocks, particularly when bullish numbers are reported for a stock that's heavily shorted. That fuel can ignite a large short squeeze in any equity. Short-sellers rush to cover their positions to avoid huge losses as investors react to the news and snap up the stock.
You only need to find a couple of these candidates in a year to enhance your returns -- the gains become so outsized in such a short timeframe that your profits add up quickly.
Don't forget that these stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. Manage your risk accordingly. Sometimes its best to wait for the stock to break out, letting the trend emerge after the market has digested all of the news.
Related: 5 Shorted Bank Stocks Set to ClimbHowever, sometimes the stock is going to be in such high demand that you will miss a lot of the move. That's when it's only worth betting prior to the report if you have a very strong conviction that the stock is going to explode higher. Here's a look at a number of stocks that could experience big short squeezes when they report earnings this week.