At the time of the fork any one who is short bitcoin on Kraken (and I imagine any other exchange supporting bitcoin cash) will be debited an equal amount of BCH.
example: margin sell (short) 10 XBT/USD = -10 BCH (short xbt, long usd)
Because of this, there is absolutely no way to break even off of a Bitcoin short, let alone profit.
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Or am I missing something big?
I don't understand your logic. Why is there no way to profit from a short?
Here's an example scenario:
I go short 10 BTC at $2700, and wait for the fork. In effect I have borrowed 10 BTC and sold them for $27k. I don't have access to the $27k.
After the short, BCH flops as expected. It's trading for $2 or whatever. BTC has also dropped in price because of all the FUD. It's at $2k. I decide to close my short.
I buy 10 BCH (cost $20) and 10 BTC (cost $20k) and pay off my loans. I have made $7k profit. In reality I'll have to pay some interest and exchange fees, but the basic shape of the trade still stands.
Could this be what you missed?