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Options activity is surging in the high yield market

The high yield bond market bounced off of multiyear lows this week as equities rallied in the face of Wednesday's highly anticipated Fed announcement. Despite the move, the high yield corporate bond ETF, the HYG, was still down 10 percent this year, and some traders sense more pain could be coming.

On Tuesday, when the HYG was up more than 1 percent, someone bet $1 million that the ETF will continue to fall for the next month. The trader purchased 25,000 of the January 77/74 put spreads for 40 cents each. This is a bearish strategy where someone will buy a put and sell a lower strike put of the same expiration to offset the cost. The goal is for the stock to drop to the put you are short or, in this case $74 by January expiration. That's as much as an 8 percent drop from its current price of around $80.

Read MoreThe correlation between the S&P 500 and high-yield bonds

"Over the last month, options volume has exploded in the HYG," Dan Nathan told CNBC's "Fast Money" on Tuesday. This week alone, options volume was six times its daily average on Monday and two times its daily average in the following session. "It's extraordinary what's going on here," the RiskReversal.com founder said.

The collapse in the oil market sparked havoc in junk bonds in recent weeks, pushing the HYG to its lowest level since 2011. "There's been a lot of chatter that these ETFs are a problem," Nathan said. Last week, on CNBC's "Fast Money: Halftime Report" billionaire investor Carl Icahn expressed his concern for the credit market, calling it a "keg of dynamite that sooner or later will blow up."

Nathan noted that the HYG recently tested its 2011 low and bounced, which he said is a very important level for investors to watch. "I suspect we continue to see put buying until there is some sense that investors are out of the woods here and there's no contagion risks."

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

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