Shutterfly (SFLY) Sinks 18%, Put Options Zoom 400%+

We mentioned competition was heating up in this sector and the results showed after last night's close with the company missing Wall Street's expectations. Shutterfly reported a profit of $2.63 a share on revenue north of $561 million. The suit-and-ties were looking for $2.84 a share on revenue just south of $584 million.

To make matters worse, 2017 guidance was lowered to a profit of 45-80 cents a share versus expectations for $1.19. Current quarter guidance called for a loss of $0.84 a share but that was upped to a loss of $0.95-$1.00 along with reducing its workforce by 260 people.

We have followed the stock for quite some time and have felt it was an overvalued stock over the past few years. We knew timing a possible selloff would depend on earnings and we were pleasantly surprised after seeing the company would announce after yesterday's closing bell. Needless to say, we knew this would be our shot but that it would also be an "all-or-nothing" trade if earnings had been a blowout.

Shares were down 18% to $42.45 in after-hours trading. If these levels hold into this morning's open, these put options will be at least $5 in-the-money. We set the first exit target 20% higher than $5 as rookie traders will rush in on the open to possibly buy these near-term options. We can then set a stop on the other half of the trade while riding the puts higher on continued weakness.

The chart below shows the October 2016 low at $42.07 ahead of the earnings announcement and the surge to $49 afterwards. Last month's run to $54.60 was a fresh 52-week peak. Obviously, a close below $42 would likely lead to a test to $40 or below. The 52-week low is at $35.91 and we're betting a test to $36 easily comes and why we want to leave some on the table.