What's the idea?
The middle market remains a crucial part of the US economy, contributing one-third of private-sector GDP and employing some 48 million people. However, traditional banks have been increasingly reluctant to lend to middle-market companies. According to the NFIB, less than 25% of smaller businesses had their credit needs met in early 2024, the lowest level since 2022.
Blue Owl's diverse portfolio, valued at $12.4 billion as of March 31, 2024, includes investments in 31 industries. Despite challenges such as rising borrowing costs, the company's high weighted average total yield has allowed for stable interest income growth, supporting its dividend payouts. The company has demonstrated strong financial performance, with consistent dividend increases since its IPO in 2019 and a forward dividend yield of 11.2% in 2024, reflecting its commitment to returning value to shareholders.
Buying a combination of stock and stock options gives an investor the opportunity to increase potential returns without increasing the potential risks. We recommend buying CALL options on OBDC stock with a strike price of $15.00 and an expiration date of 17/01/2025. The option will cost about $0.38, while one contract will cost around $38, as options are traded for 100 shares.
About Company
Blue Owl Capital Corporation (OBDC) is a specialty finance company focused on lending to US middle market companies. It provides financing in the form of senior secured, unsecured, subordinated or mezzanine loans and, to a lesser extent, equity-related securities and warrants for growth, acquisitions, market or product expansion, refinancing and recapitalization. Blue Owl was founded in 2015 and is headquartered in New York, USA.
Why do we like CALL OPTION OBDC.US @15?
We have previously presented an investment idea on Blue Owl Capital Corporation, which you can find in the Investment Ideas section of our website.
Blue Owl Capital Corporation (OBDC) is a business development company (BDC) that focuses on lending to US middle-market companies, which typically have annual EBITDA of $10 million to $250 million and revenue between $50 million and $2.5 billion. Blue Owl provides financing primarily through senior secured and unsecured loans, with some involvement in subordinated and mezzanine loans, as well as equity-related securities. The firm targets investments across various sectors, including healthcare, software, aerospace, and business services, with loan sizes ranging from $20 million to $250 million and maturities of three to ten years.
The US middle market is a crucial part of the economy, contributing one-third of private sector GDP and employing 48 million people. However, most of the companies face increasing challenges in obtaining funding from traditional banks, which have shifted their focus toward larger corporate clients. Blue Owl has capitalized on this shift in the credit market by maintaining a defensively positioned, diverse portfolio. As of March 31, 2024, the company managed $12.4 billion in assets, with 81% of its investments in senior secured loans and 97% in floating rate debt. Despite a slight decline in key financial metrics like average borrower revenue and EBITDA, the company remains focused on its strategic investment approach and continues to prioritize senior secured loan solutions for US middle-market companies.
Blue Owl's strong financial performance supports sustainable dividend growth. In 2023, the company increased its total investment income by 32% and its net investment income per share increased by 4.4% year-on-year in Q1 2024. Blue Owl has also managed to increase its net asset value (NAV) per share, reaching $15.47 in Q1 2024. With high interest rates supporting interest income, the company is well positioned to maintain its financial stability and deliver strong returns to shareholders, as reflected in its forward dividend yield of 11.2% for 2024.
We believe that buying long-term CALL options on OBDC stock could provide an attractive investment opportunity in the current environment.
We recommend buying the stock options with the following parameters:
- Option type: CALL
- Strike: $15.00
- Expiration date: 17/01/2025
- Option cost: $0.26
- Target price: $0.8
- Potential yield: 207%
- Breakeven point: $15.38
- From current share price to breakeven point: +3.0%
- Maximum possible loss: $38
Why is investing in stock options sometimes more effective than investing in stocks? You don't need to have a lot of capital to start trading stock options. For example, at the current OBDC stock price of $14.93 per share, 100 shares would cost more than $1,493, while buying an option contract would cost only $38.
Moreover, stock options provide significant leverage, i.e. if the stock price rises sharply, an option position would yield a significantly higher return than a similar stock position. For example, a 10% increase in the OBDC stock price by the expiration date of 17/01/2025 would result in a 276% increase in the stock option value.
The table below summarizes the yields of various investment strategies using OBDC shares and stock options depending on the stock price performance on the expiration date.
Proportion of shares and stock options in a portfolio, based on the amount invested
In order not to take on too much risk, you can use a strategy of buying shares and options on the same asset at the same time, in a certain proportion. As you can see from the table above, this investment strategy allows an investor to achieve a higher return than by buying only shares, while keeping the risks lower than when buying only options.
How to use the idea
We recommend buying long-term CALL options on OBDC stock with a strike price of $15.00 and an expiration date of 17/01/2025. The option will cost about $0.38, while one contract will cost around $38, as option deals are concluded for 100 shares.
The investor will profit if the underlying asset’s price is above the breakeven point of $15.38 on the expiration date. The higher the OBDC stock price rises above this point, the greater the profit will be. We recommend closing the position when the option price reaches $0.8. In this case, the profit will be more than 207%.
The investor will incur a loss on the option if the OBDC stock price falls below the breakeven point by the expiration date. The maximum possible loss, i.e. 100% of the option contract value, will occur if the stock price falls below the strike price, or $15.00 in our case.
The chart below shows the distribution of profits and losses from the option position depending on the OBDC stock price on the expiration date.
If the stock price rises with increased volatility, the options would show significant growth in a shorter period of time before the expiration date.
Important note
Options must be purchased with a limit order. Buying an option contract with a market order can result in extremely unfavorable prices.
This is a speculative investment idea which carries increased risks. Investing in options can provide a 50%, 100%, 200%, and in some cases even higher returns, but also can lead to a complete loss of the amount invested! In cases where volatility is low, profit or loss can vary between 20% and 30%.
A prudent approach to implementing option ideas is to invest a small portion of the portfolio in many such cases. In this way, losses from unsuccessful ideas will be compensated by high returns on successful investments.
Key risks
There is a possibility that some negative corporate news could lead to a decline in the OBDC stock price. In this case, the CALL options would become devalued. Excessively low volatility in OBDC stock may result in the options becoming devalued by the expiration date.