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squashnut, check out the site It will give you an idea of the short interest for a given company. "Days to cover" and "Short Percent of Float" are the first two indicators I look at.

I'd also recommend taking a small enough position that you can ride out a major squeeze and potentially add to your position should such a squeeze occur. For example, if you're short Lehman, are you going to cover if it hits 35? If so, when will you short again? If after covering, LEH immediately drops to 32 are you going to short it again then? If not, when will you short again? What if it then drops to 28?

The action on the shares I've shorted has been so abrupt that its made me realize I'm the world's worst timer. If I'd just held on the my shorts instead of covering the squeezes and then reshorting (usually at what ends up being a lower price than my cover) I'd be significantly ahead.

But the warning on holding on is you need to have a small enough position to be able to withstand a major squeeze. If you short LEH and LEH goes to 45, can you take the pain? Self-doubt and emotion really kick in if your position is large enough to damage you. Before they went to single digits Countrywide went from 33 to 41 and 20 to 27. Downey went from 22 to 37, MBIA from 28 to 42, ABK from 20 to 33. If you shorted too large at the bottom of these troughs and were forced to cover, you would have ended up missing on some of the great short plays of the year.