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By this measure, trading in retail sector hasn't been this cheap in years, says market watcher

This Prime Day, options traders bet on price cuts for retail stocks

Amazon isn't the only one dishing out discounts on Prime Day.

As consumers flocked to the e-commerce giant's website to take advantage of the 48-hour sales holiday, traders were making moves in the SPDR S&P Retail ETF, the XRT.

In fact, "put volume outpaced call volume by about 5 to 1" in the XRT on Monday, the first day of Amazon's buying promotion, said Mike Khouw, co-founder and chief strategist at Optimize Advisors and a resident options expert on CNBC's "Fast Money."

The reason? "Options on XRT right now are trading at, essentially, three-year lows," Khouw said Monday on CNBC's "Options Action," noting that their 17.4% implied volatility was approaching the three-year low of 16.5%. Implied volatility refers to the odds that a stock's price will change over time.

One of the largest bets was a purchase of 1,400 of the September $42 put options, which cost roughly $1 each, Khouw said.

"A buyer of those puts is betting that XRT is going to fall below the $42 strike price by at least the dollar that they paid," he said. "That would represent a decline of at least 5% by September expiration."

The XRT traded less than 1% higher in early trading Tuesday, hovering above the $43 level.

With Amazon pulling focus away from other retailers during its sales extravaganza, trader Carter Worth offered another way to play the rise of online retail.

"If anyone's got the muscle and the staying power to compete with Amazon, obviously, it has to go to Walmart in terms of top contender," he said.

Walmart and Amazon shares were lower Tuesday morning. Walmart began the day by reaching a 52-week high.