This is one way to play for a stock market disaster: Trader

Two ominous signs are flashing a red light for one very important area of the market — and that could mean trouble down the line for equities.

The combination of bearish technicals and options activity has some worried the high yield market is about to take a dismal turn, trader Dan Nathan said Thursday on CNBC's "Fast Money."

First, he pointed out that a death cross has formed on the chart of the HYG, the ETF that tracks high yield. "This is a momentum indicator that things could be moving lower," he said. Technicians see this sort of pattern as a bearish reversal in trend. Market participants often look to the high-yield market as a leading indicator of where equities could go next. The last two sell-offs in the stock market were preceded by a decline in the HYG.

Read More Fear trade: 2 ETFs to own if sell-off intensifies

Furthermore, the founder noted that there has been an increase of bearish bets in the options market on the HYG — with one trade in particular raising eyebrows.

In the large wager, one trader purchased 22,500 of the December 75-strike puts for $1.33 each. Since every options contract accounts for 100 shares of stock, this is a $3 million bet that the HYG ETF could fall below $73.67, or more than 11 percent by the end of the year — levels the HYG has not seen since the financial crisis.

"If you are looking to play for a disaster later on in the year, this is one way to play it looking at defined risk," said Nathan.

Latest Video


Host Bio

  • Melissa Lee

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

Options Action Traders

From Our Sponsor

Sign Up for Our Newsletter Options Action

Insight directly from the members of our Options Action panel
Get this delivered to your inbox, and more info about about our products and services.
By signing up for newsletters, you are agreeing to our Terms of Use and Privacy Policy.