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Behind the $1 million bet on Fox earnings

Shares of Twenty-First Century Fox have been struggling this year, but some are betting it will see a huge rally in the coming months.

The studio's Class A shares are down 11 percent in 2015. However, on Tuesday, when options volume on the stock was eight times its average, one trader placed a sizable position that Fox shares will turn itself around.

Specifically, a trader bought 20,000 contracts of the January 42-strike calls, paying 50 cents each. As each contract controls 100 shares, the trader is wagering $1 million that 21st Century Fox Class A shares will be at least 25 percent above Friday's close by January of next year. Calls are bullish bets that give its purchasers the right to buy a stock at a set price by a given date.

Yet the trader may not need such a large move over a long period of time to see huge gains from these long-dated, out-of-the-money calls. According to options expert and CNBC contributor Mike Khouw, the trader has gained leverage ahead of Fox's earnings release, scheduled three weeks from now.

Rupert Murdoch
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Rupert Murdoch

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"Although not usually used for that purpose, these options have a relatively small upside break-even to offset the anticipated decay over the next nine months," said Khouw. "Although Fox needs to be up 25 percent to break even by expiration, it probably needs to be up only about 2.5 percent by earnings to break even."

By Wednesday, the 42-strike January calls were trading at 55 cents, meaning the trader has a paper profit of 10 percent—or $100,000—in just one day.

This isn't the first time someone took a huge bet with the 42-strike calls. "About a year ago, also in this week in April, someone bought about 10,000 of those same calls," Khouw said.

At the time, Fox Class A shares were trading around $32 each. They reached an all-time high of $39.27 on Dec. 23 of that year.

Two months ago, several of the company's shareholders sought to swap out their Class B stock for Class A shares. Though Class B shares have voting rights, they began trading at a discount to ordinary Class A shares. According to data compiled by FactSet, Rupert Murdoch and his family have 39 percent of the voting rights in Twenty-First Century Fox even though they own a fraction of that in equity.

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