Shares of American Realty Capital Properties got demolished on Wednesday, after the real estate investment trust shocked investors with the disclosure of accounting errors. But in the options market, traders capitalized on the weakness to get in on the stock, betting it would make a recovery by January.
In a filing with the SEC, American Realty announced "non-reliance on previously issued financial statements." While saying that their earnings reported in according with U.S. Generally Accepted Accounting Principles (or GAAP) were accurate, the company reported that it overstated adjusted funds from operations (or AFFO). Worse, according to the filing, the company's Audit Committee "believes that this error was identified but intentionally not corrected, and other AFFO and financial statement errors were intentionally made," which resulted in "an understatement of the Company's net loss for the three and six months ended June 30, 2014."
The filing went on to report that the company's chief financial officer and chief accounting officer have resigned.
Generally, investors do not like to hear that the company they are investing in has intentionally misstated financial statements. And shares of American Realty (which trades under the ticker symbol ARCP) opened 20 percent lower on the news, and at one point in the session had shed a third of their value.
Yet in the options market, hungry traders spotted opportunity. An incredible 91,482 options contracts traded on Wednesday—14 times the average daily options volume. And interestingly, most of the options traded were bullish call options. In fact the most popular American Realty options contract, the January 10-strike calls, were one of the most heavily traded options lines of the day for any stock.
"Normally, if you were a publicly traded company, you'd like to be counted among that list" of popular stocks for options trading, Dash Financial chief strategist Michael Khouw noted dryly. "But in this case, not so much."