Some investors believe the market has rallied back too far, too quickly, and that we’re due for another significant pullback. And now with share prices starting to trade lower in recent sessions, fear is creeping back into investors’ minds. It is this fear and volatility that can increase the upfront premium income available in the options market, and give investors another chance to pick up attractive shares at lower prices. This report shares an income-generating options trade on a highly attractive long-term BDC investment. We believe it’s an attractive trade to place today potentially over the next few trading sessions, as long as the underlying stock price doesn’t move too dramatically before then.
The blue line in the chart above is the year-to-date total return of BDC Main Street Capital (MAIN)..
The Trade: Main Street Capital (MAIN)
Sell Put Options on Main Street Captial (MAIN) with a strike price of $25 (~19% out of the money), and an expiration date of July 17, 2020, and for a premium of $0.50 (this comes out to 24% of extra income on an annualized basis, ($0.50/$25 x (12 months, annualized). This trade not only generates attractive income for us now, but it gives us the possibility of owning shares of MAIN at an even lower price if the shares fall even further than they already recently have, and they get put to us (and we’d be happy to own MAIN, especially if it falls to a purchase price of $25 per share).
Note: If you want higher upfront income, and a higher chance of having the shares put to you, consider selling the $30 puts instead.
Your Opportunity:
We believe this is an attractive trade to place today and potentially into early next week as long as the price of MAIN doesn't move too dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 20%, or greater.
Our Thesis:
Our thesis is basically that Main Street’s current share price is already attractively low as compared to its conservative balance sheet, diversified portfolio and well-covered dividend. Even though Main Street will absolutely suffer negative consequences from the coronavirus, its share price already reflects a lot of potential damage, and if the shares were to fall to $25 and get put to us, that would be an extremely attractive price on a relatively very attractive big-dividend payers. We recently wrote in great detail about MAIN, and you can access that full report here: Main Street Report.
If you are afraid you already already missed all the attractive “buy low” opportunities in this market, this trade gives you another bite at the apple, and it also gives you some attractive upfront income that you get to keep no matter what.
Important Trade Considerations:
Please also keep in mind, options contracts trade in lots of 100, so to secure this trade with cash (in case the shares get put to you and you have to buy them) you’ll need to keep $25 times 100 on hand (the strike price times an options contract lot of 100). You’ll also need to be comfortable holding that many shares in your account from a position-sizing / risk management standpoint. Alternatively, if your account is approved for margin (borrowing) you don’t need to keep the cash on hand in case the shares get put to you, just know that if they do get put to you—you’ll buy them “on margin” and get charged the borrowing interest rate in your account (some investors are okay with this, others simply prefer to keep the cash on hand).
Two additional considerations when selling put options are dividends and earnings announcements because they can both impact the share price and thereby impact your trade. In this particular case, earnings is largely a non-issue because MAIN isn’t expected to announce earnings again until August (after this contract expires). However, MAIN does pay a steady monthly dividend that investors need to be aware of. However, in this case, the premium income is significantly large (and our strike price is significantly far out of the money) that we are quite comfortable with the impacts and this trade.
Also worth mentioning, Main Street recently reaffirmed its standard $0.205 cent monthly dividend payments, however supplemental dividends have been put on hold. As we wrote in our earlier full report on MAIN (see link, earlier in this report), the standard dividend remains healthy, covered, and supported by a conservative balance sheet. We like MAIN as a long-term investment.
Conclusion:
MAIN is a financially strong, well-managed, BDC that will weather the coronavirus pandemic better than many of its smaller weaker peers. MAIN is attractive at its current price, however it may come under increasing short-term pressure if the entire market sells off again as many nervous investors believe it could. We cannot predict short-term market moves (no one can), but we like MAIN as a long-term investment.
We currently own shares of MAIN, but if you are uncertain about pulling the trigger on a normal buy order, you might consider this trade instead. It allows you to generate attractive upfront premium income that you get to keep no matter what. And this options trade also gives you a chance of picking up shares of this attractive long-term high-dividend BDC at an even lower price, if the shares fall even further than they already have, and they get put to you at $25. And at a price of $25, MAIN is an extremely attractive long-term investment.