The Tesla stock rally is driving the shorts forward, wiping out a year's worth of gains in one day

(Bloomberg) — Tesla Inc.'s stunning gains surprised everyone.

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But it was the Bears who paid the price this week. The electric vehicle maker's results dealt a blow to short sellers – investors who make money by betting that a security will fall over a period of time – as they saw their entire year's worth of gains evaporate in just one were destroyed on a single day.

Expectations for the electric vehicle giant's after-hours report on Wednesday were low, the stock was down about 14% for the year, and Wall Street and Main Street alike expected demand for electric vehicles to continue to struggle. Instead, Tesla delivered an optimistic report and Chief Executive Officer Elon Musk told investors that the company would see vehicle sales grow by up to 30% next year.

By the end of Thursday, Tesla had added $150 billion to its market value with a 22% rise in shares – its biggest single-day jump since 2013. Short sellers, on the other hand, suffered an estimated mark-to-market loss of $3.5 billion, according to Information from S3 Partners. Worse, their annual profit of $1.7 billion was wiped out, and short positions for 2024 are now down $1.8 billion.

“Tesla’s forecast was exceptional,” said Steve Sosnick, chief strategist at Interactive Brokers. “At least yesterday, the market was willing to trust Elon Musk’s sales growth claims.”

The report didn't just surprise Shorts. Analysts on average expected Tesla to report a 10% drop in quarterly profit. Instead, the company reported a 9% increase over the same period last year. And a key metric for Tesla – automotive gross margin excluding regulatory credits – also exceeded expectations.

A look at options positioning shows that investors were not prepared for a big rise. Options trading suggested traders expected the stock to move about 6% in either direction following the results. First of all, that's a low number considering that Tesla stock is up at least 9% after the last seven quarterly reports.

Now that at least some confidence has been restored that the worst of the decline in electric vehicle demand may be over and the company is making steady progress toward developing a fully self-driving car, investors are piling back into the stock. Demand for call options increased as traders chased the rally. Three-month calls opened at a premium to bearish puts on Thursday for the first time since late August.

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