Credit Spread on ARCC – 1.01% potential income return in 37 days

On November 11, 2020, we sold a bull put credit spread on the ARCC stock with an expiry set in the next 37 days. For this trade, we get a premium of $0.20 per share (before commissions)

Ares Capital Corporation (NASDAQ: ARCC) is a market-leading Business Development Company and one of the largest direct lenders in the U.S.

Prior to this credit spread, we actually bought 20 shares of AARC for my mom's pension fund, and we plan to increase our stake here gradually to 100 by the end of the year and start selling covered calls. 

There are two simple reasons we like this stock - it has a high dividend yield of about 10%, and we can trade both put and call options

Here is our trade setup:

  • BOT 1 AARC DEC 18 '20 - 15 + 134Put Bull Spread  -0.2 USD 

For this trade, we got a premium of 15.2 USD (after commissions) or a 1.01% potential income return in 37 days. 

These trades come as the #9 and #10 in the month of November, according to our trading plan for this month, the premium generated from this trade makes us about3.37% from our $450 monthly goal, while in total we have already reached 27.42% so far.

What happens next?

On expiry date (December 18, 2020) ARCC is trading above $15 per share -  options expire worthlessly and we keep premium - if ARCC trades under $15 on the expiry date, we get assigned.

But as we already have collected a premium of 0.15 per share, our break-even price for this trade then is $15-$0.15 = $14.85

In other words, ARCC can fall from the current price of $15.5 way down to $14.85 and we will still be break-even

As we are selling credit spread here, in case ARCC suddenly drops below our second bought put at the strike price of $14 it will help to mitigate risk, in other words - selling credit spreads has a lot of advantages.

Selling credit spreads with ARCC stock
Selling credit spreads with ARCC stock
  • Running Total  6 Trades since August 12, 2020
  • Options Income: $59