This will be 'the next sector to drop’: Trader

With biotechs and momentum names having been crushed in recent weeks, one trader sees the weakness extending to a section of the market that has stayed relatively strong: transport stocks.

"I want to look at economically sensitive sectors like the transports," Dan Nathan of RiskReversal.com said on Friday's episode of "Options Action." "When you look at the IYT, which is the iShares ETF on the transports, when it broke out of 100 in early 2013 it went up 30 percent. You would have thought it was a social media company this year."

Getty Images

But while transport stocks have been buoyed by positive expectations about economic growth, Nathan doesn't actually believe that the economy is particularly strong.

"The world is convinced ... that the economy in the U.S. is improving," Nathan said. "I'm not so certain about that. I'd rather be a bit skeptical based on some of the price action that we've seen in the equity markets up here."

Read MoreWhy earnings will make or break the market this week

Mike Khouw of Dash Financial agrees that economic optimism has made transport stocks vulnerable.

"FedEx and UPS are valued essentially based on a recovering economic growth story. These things are not overwhelmingly cheap at current levels," Khouw said. "There's probably more risk to the downside in the near term."

To make a bearish bet on transport stocks, Nathan recommends buying a put spread on the (IYT) ETF he referenced. But the key to this strategy is that economic data have to stay weak.

"This is a sector where I think, if we get mildly poor economic data, the market stays the way it is, I think this is the next sector to drop," Nathan said.

—By CNBC's Alex Rosenberg.

Follow the show on Twitter: @CNBCOptions.

Contact Options Action

  • Showtimes

    Fridays, 5:30p ET
    Saturday, 6a ET
    Sunday, 6a ET
  • Melissa Lee

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

Latest Video

Sponsored Related Links

More on thinkorswim by TD Ameritrade

  • Make sure you’re always keeping up with the market with up-to-the-minute news and breaking stories. Move on possible breakout stocks and options with potential opportunity. Plus, get in-depth analysis on futures and forex in one seamless, integrated experience. Join TD Ameritrade and trade commission-free for 60 days + get up to $600 cash.

You Make the Call

  • Options Action: NWSA

    Mike Khouw, Options Action trader, shares his view on News Corp stock on the heels of testimony from Rupert Murdoch before British Parliament.

  • Do you have a question for the Options Action team? Options Action selects a viewer's question and gives the answer on the show's Make The Call Web Extra video.