Short Squeeze

The potential for big, quick payoffs makes short squeeze stock plays an attractive strategy for investors savvy enough to find the right companies.

Of course, buying stocks that are heavily shorted - that is, a large number of investors have bet the stock will fall - carries substantial risk.

Shorted stocks typically suffer from one or more significant concerns about the company's business prospects.

Short sellers borrow stock and sell it at the current price, but are obligated to replace the shares they borrowed at some point in the future. If the stock falls, they profit.

But if the stock rises, and particularly if it rises quickly, the shorts stand to lose.

That sets up a short squeeze, with investors who are short scrambling to "cover" their positions and minimize losses before the stock goes any higher.

Of course, if a stock is heavily shorted, the rush to buy drives or "squeezes" the price even higher.

Investors who see a silver lining in a beaten down, shorted stock will buy in and wait for some good news to start pushing the price up, spooking the shorts into action.

Of course, that good news may never come.

That's why investors who want to use the short squeeze stock play must choose their targets carefully.

Here are Money Morning's five favorite short squeeze stock plays right now: