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philh comments on Stupid Questions, December 2015 - Less Wrong Discussion
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You usually avoid unlimited liability by placing a stop order to cover your position as soon as the price goes sufficiently high. Or for instance you can bound your losses by including a term in the contract which says that instead of giving back the stock you borrowed and sold, you can pay a certain price.
The stop order feels hackish, to me. I was thinking along the lines of short squeezes even before I learned their name. But also, if I'm expecting a bubble to burst, I won't necessarily be surprised if the price rises massively before it does. I'd be looking for limited exposure without having to chicken out.
The contract term sounds like the sort of thing I was looking for.
You can always play with options to construct whatever payoff structure you desire.