Tesla Inc. shares zoomed toward their highest level in months after the Silicon Valley car maker surprised Wall Street with a quarterly profit, but at least one corner of the equity market was licking its wounds on Thursday.

Tesla TSLA, +16.93%  short sellers were in for about $1.4 billion in paper losses post third-quarter earnings, S3 Partners, a financial technology and analytics firm, said in a note. Before the rally, short sellers, who bet on a stock falling in price, were up more than $2 billion in mark-to-market profits.

Tesla is the second largest short in the U.S. equity market behind Apple Inc. AAPL, -0.02%  

Shorts sellers have been trimming their Tesla positions since June, and many reduced their exposure ahead of earnings, hedging for a strong earnings report. About $8.3 billion worth of shorts held on to their positions, however, "and took a major hit to their bottom line," S3 said.

"We are expecting more short covering and the continuation of this long-term short squeeze as (Tesla's) stock price continues to show strength," S3 said in a report Thursday.