Rolling A Protected Investment In Shutterfly

| About: Shutterfly, Inc. (SFLY)

In a previous article, prior to Shutterfly’s (NASDAQ:SFLY) earnings report, I outlined a way to protect a position in Shutterfly and pay for the protection using a collar.

A collar is entered by selling a call option against a stock and using some of the proceeds from selling the call option to purchase a put option for protection. A nice attribute of the collar is that it typically doesn’t require additional capital for entry.

In the previous article, the collar position mentioned for Shutterfly had a maximum potential loss of 8.7%. In the meantime, Shutterfly’s stock price has dropped around 25% as shown below:

(Click to enlarge)

An investor in the collar position would now only be down 8.7% instead of down the very painful 25% by holding a long position in Shutterfly.

For those of you who entered the collar, the protective put option is about to expire, and you may be wondering what to do next. Follow along with me and I’ll try to give you some “options” to consider. And, for those of you not previously protecting your Shutterfly investment, you can also tune in to see some courses of action you might consider.

Even though the company’s stock price has declined 25%, its P/E ratio has increased from 81 to 106. So even though the company’s stock price has declined, the company’s stock price looks even more expensive than it did three weeks ago.

Shutterfly’s stock price busted through its support level at $42 and looks likes it's about to bust through its support level at $34. It appears the next support level is around $23, so Shutterfly’s stock price still has a lot of room for more pain, around 30% more pain – ouch!

One “option” for a Shutterfly investor is to enter a collar position as discussed in the previous article. Using PowerOptions search tools, a collar position for Shutterfly is available with a potential return of 2.3% and a maximum potential loss of 9.4%. The time frame for realizing the potential return is 120 days. The specific call option to sell is the 2012 March 35 at $3.70 and the specific put option to purchase is the 2012 March 30 at $2.95. If the price of SFLY is unchanged at expiration in March, the position will return 2.3%. And, if the price of the stock continues to drop, the maximum potential loss is 9.4%. Additionally, if the price of SFLY is greater than or equal to the $35 strike price of the call option at expiration, the position will return 5.7%. A profit/loss graph for the collar position is shown below:

Another “option” for investors in Shutterfly is to enter a married put position by purchasing a put option. This strategy requires additional capital, but allows an investor to participate more in an upward movement in the company’s stock price. An example married put found using PowerOptions search capability was found with a maximum potential loss of 5.9% and a time frame of 120 days, same as the collar position. The specific put option to purchase is the 2012 March 40 at a price of $8.70. A profit/loss graph for the married put position is shown below:

A married put investor can also opt to sell call options against the married put position once the price of the stock has increased above the $40 price of the put option.

In its most recent conference call, the company indicated it has begun cross selling products between Shutterfly and its recent acquisition Tiny Prints. Maybe this will be just the trick for Shutterfly to have a happy holiday season. And with the holiday season approaching, Shutterlfy should perform well, but can the company perform up to the high expectations of the market? With a protected investment in Shutterfly, an investor might be able to enjoy the upcoming holiday season more than an investor with an unprotected investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.