Breaking Down a Potential Shutterfly Stock Short Squeeze

Shorts may wait to cover their winning bets until the new year

It's been a rough six months for Shutterfly, Inc. (NASDAQ:SFLY), with the shares down 60.6% from their June 5 record peak of $100.34, last seen at $39.91. SFLY stock bottomed near familiar support at $35 during the Christmas Eve sell-off -- a region that's served as a floor since 2014 -- and the equity could be set to spike higher from here at the start of the new year.

As Schaeffer's Senior Quantitative Analyst Rocky White recently noted, short sellers often wait until the turn of the calendar year to cover their winning short trades, which allows them to delay paying taxes on profits until the next year and gives a short-term boost to the embattled stocks. Shutterfly popped up on a list of stocks that have rewarded short sellers handsomely this year, and could see a short squeeze in early 2019 as these bearish bets are covered.

Diving deeper, there are currently 4.85 million SFLY shares sold short, representing a healthy 14.6% of the stock's available float. It would take short sellers almost a week to cover these bearish bets, at the equity's average daily pace of trading.

Those wanting to bet on a short-term pop for Shutterfly may want to consider doing so with options. Not only are options cheaper to buy than the underlying stock, but SFLY, in particular, has tended to reward premium buyers in the last 12 months. This is based on the equity's Schaeffer's Volatility Scorecard (SVS) of 100 -- the highest reading -- which indicates the security has made outsized moves in the past year, relative to what the options market priced in.