The 21-year-old had been tipped as a star of the future when he moved to the Bernabeu last summer from Real Betis.
However the midfielder has struggled for action at Madrid this season and, according to Mundo Deportivo, he will be allowed to leave this summer.
That news will be of great interest to Liverpool, who have been tracking Ceballos closely for a number of months.
The Reds are not alone in their pursuit of the Spaniard, though, as both AC Milan and Juventus are keeping tabs on him too.
Real Madrid have reportedly told interested clubs that Ceballos will not be sold for less than £25m.