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Dagon 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.
Note that for volatile assets (the very ones where you feel uncomfortable about unbounded risk), stop orders are not guaranteed to help. Remember, prices are not continuous - there is a discrete sequence of bids. Price can go from below your stop to MASSIVELY above it before your stop order can be executed. Most often this happens on news when a market is closed, but it can occur intraday as well.