The photo borders tutorial shows how to but a border around the photo. If you use a round marque tool to make an oval, make the border very wide and the feather very wide, it will blend out to transparent. You can then put it over your background and it will look like it is floating.
I did a google search and found this, which is pretty basic, but should work.
"Alternatively, you could drag a marquee around the edge of the object you want to fade (or CTR click the layer to select it), then go to SELECT > FEATHER, and enter a suitable amount (it depends on the res of the pic your working with). Then SELECT > INVERSE, and delete (or fill) the selection.
This method does not leave that "pointy" part at the border, but rather rounds them out. " stuyong88 at the Good Tutorials site.
and here is another one with pictures:
I hope this helps.