Tesla (NASDAQ:TSLA) was one of the undisputed winners of 2020, with the stock gaining 743% over the course of the year. There were a number of factors that contributed to the electric car maker's surging stock price, including five successive quarters of profits, induction into the S&P 500 Index, and a well-received stock split.
However, short sellers that bet against the stock lost a massive $40 billion in 2020, making it the single most unprofitable short of the year. Short sellers lost a combined $245 billion last year, with Tesla costing shorts more than the next nine stocks combined.
That's according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners. This "is not only the largest mark-to-market loss for any stock this year, it is the largest yearly mark-to-market loss I have ever seen," said Dusaniwsky. He went even further, noting it was "far and away the most unprofitable trade in 2020 and had the largest yearly loss we have seen historically."
When investors short a stock, they "borrow" the security from their brokerage and sell the shares at the current price, pocketing the proceeds. This commits the borrower to buying the shares back at a later date. They expect the shares will fall, enabling them to buy the stock back at a lower price, returning the shares to the lender, and allowing them to keep the difference.
While that works in theory, it doesn't always play out that way in practice. In the case of Tesla, the stock soared, setting up a so-called "short squeeze." As the stock price begins to rise, investors betting against the stock are forced to buy shares at a loss in order to cover their short positions. This, in turn, creates additional demand, sending the stock price even higher, forcing other doubting Thomases out, and fueling additional share price gains.