Rupert Murdoch is breaking up News Corp., and options traders seem to think that it could be very good news for the stock.
Just look at Tuesday's heavy options volume in News Corp. shares. Nearly nine times the average daily call volume traded, and 25 calls were traded for every put, which tends to indicate a great degree of bullish speculation around a stock.
The biggest trade of the day was the purchase of 20,000 July 30-strike calls for $2.00, which is a bullish bet that the stock will be above $32.00 at July expiration.
News Corp. is up 15 percent year-to-date, and is currently at 52-week highs. The stock's strength has been due to better-than-expected net income growth, which has outpaced both the S&P 500 and the media sector. Revenues have also been increasing, albeit slightly, which has helped to drive the earnings growth.
News Corp. has announced that it will spin off its publishing division from its more profitable and higher-growth cable channels and Hollywood movie studios, and it recently announced the terms of that separation. The publishing division will retain the News Corp. moniker, and will receive a $2.6 billion cash injection. This could unlock value for the remaining divisions at News Corp., which will now be able to command a higher multiple in the market.
The spinoff is set to occur this summer, around the expiration of these July options. This trader is therefore looking for a modest run-up in the share price into the spin-off. Since News Corp. has already enjoyed such a rally already this year and last, playing the stock with at-the-money options is a good way to fix one's risk while enjoying a high probability of catching a further move to the upside.
I don't currently hold a position in News Corp., but when you see this kind of trade go up, it provides a nice clue that this might be a stock you want to own. The fact that the call buying going all the way out to July tells me that if you are looking to add a stock to your portfolio to participate in the stock rally, this might be one that will follow along.
—Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."