Retail wreck is just getting started. How to play it: Trader

Wal-Mart rocked investors this week after the company cut its sales and earnings forecasts. The news sent the stock plummeting 12 percent in the last two sessions, and that prompted one trader to short the entire retail space as earnings season kicks into high gear.

"This space has been very weak this year," Andrew Keene said Thursday on CNBC's "Trading Nation." The XRT, the ETF that tracks retail stocks, has trailed the broader market so far in 2015, down 5 percent while the S&P 500 has fallen 2 percent.

In addition to the weak performance relative to the broader market, Keene noted that the ETF has recently rallied to its short-term 50-day moving average, which has proven to be a sell signal in recent months. "I think the XRT is headed lower," said the founder of AlphaShark Trading.

Read MoreUS retail sales rose 0.1% in Sept vs 0.2% increase expected

More troubling to Keene has been the surge in bearish activity in the options market this week. As an example, he pointed to one bet in particular where a trader bought more than 10,000 of the October 23 weekly 44.50 puts for 36 cents each. This specific trade sees profits if the XRT falls below $44.14 by next Friday, which also happens to capture earnings results from the likes of retailers such as eBay and Amazon.

The bearish options activity coupled with the poor stock performance, prompted Keene to put on an options trade of his own. To play for further pressure on the retail space, he suggested buying the XRT November 44-strike puts for 75 cents. Keene's trade sees profit if the XRT falls below $43.25 or nearly 5 percent lower in the next month.

"We have a lot of earnings coming up and I think this is a great way to trade XRT to the short side," added Keene.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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