WINDERMERE, Fla. (Stockpickr) -- When short-sellers get caught short a stock that produces a strong earnings report, a tradable short-squeeze can develop, with bears rushing to cover their positions to avoid big losses. You only need to find a few of these stocks 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 you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.
Sometimes however, the stock is going to be in such high demand that you will miss a lot of the move. That's when it can be worth betting prior to the report - buy only if you have a very strong conviction that the stock is going to rip higher.
Related: High Vol Puts Pique Interest in XLYHere's a look at a number of stocks that could experience big short squeezes when they report earnings this week.
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