Traders see rally ahead in this former high flyer

Shares of NetApp have had a rough year, but some traders are betting on a rally ahead.

After falling nearly 14 percent since the start of 2015, shares of the tech company saw a modest 1 percent gain on Thursday. But trades in the options market suggest some market participants expect a significant bounce in the stock over the next three months.

Thursday's call volume was 18 times its average. A lot of activity was centered on the June 40-strike calls, where a total 10,297 contracts traded for an average price of around 35 cents each. Since each contract controls 100 shares, that means roughly $360,000 was risked in the hope that NetApp shares would trade above $40.35, or 13 percent higher than Thursday's close, by June 19.

A call is a bullish wager that gives the purchaser the right to buy a stock at a given price within a set time period.

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"The stock is trading at a valuation that is pretty cheap from a historical standpoint," said options expert Mike Khouw. "But the options market seems today to be thinking maybe there could be a turnaround coming soon."

Khouw notes that the company's enterprise value of $11.1 billion is 5.3 times its forward expected earnings before interest, taxes, depreciation and amortization (EBTIDA). Rival tech company EMC, with an enterprise value of $49.2 billion, trades at around 6.5 its expected EBITDA. He sees an interesting relationship between EMC's premium valuation to NetApp and the big options trade on Thursday.

"Although EMC's valuation represents a 22 percent premium in terms of EV, it would be only about a 13 percent premium in terms of NetApp's market cap," he said. "That gets us, coincidentally, to about $40 per share."

NetApp, which closed Thursday at $35.62, has traded in a range between $33 and $44 for the past year. At its 2000 tech bubble peak, the stock was valued at over $152 per share.

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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