Traders are betting against another company to capitalize on Sears' demise

As Sears nears bankruptcy, some investors are looking for ways to profit from the retailer's collapse.

In an annual report filed on March 22, the company said its operating results showed "substantial doubt" about whether it would remain in business. Sears has closed hundreds of stores and sold off assets to raise cash.

Traders who bet against the company by short-selling its stock have profited as it tumbled. According to financial analytics firm S3 Partners, almost all the shares that can be lent have already been taken. But there's another closely related company that traders are betting against.

"With borrow liquidity all but exhausted on Sears Holding Corp, and with financing fees hitting the triple digit mark this week amid volatile trading activity, one might look at Seritage Growth Properties (SRG US) as an alternative short play to indirectly gain exposure to Sears' demise, without the potential massive short squeeze risk," said S3 Partners' Matthew Unterman in a note on Thursday.

Seritage is a publicly traded real estate investment trust that releases properties in over 200 shopping centers. It was formed in 2015 when Sears sold 266 of its properties to the company for $2.7 billion.

Short interest in Seritage is at a record high of as much as 35% of shares on the market, Unterman said. Seritage earns most of its income from Sears and is effectively a real estate spinoff. But it's started renting some of its Sears stores to third-party retailers, and raising the rent.

But time is running out for traders who want to short Seritage as a play on Sears, Unterman said. "With short interest in SRG continuing to rise, there may not be too much time to initiate a bearish bet as borrow liquidity tightens due to the increased demand from bearish speculators."