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                                                                   EXHIBIT 10.9

                           ALLIED CAPITAL CORPORATION
                               STOCK OPTION PLAN

1.  PURPOSE OF THE PLAN

         The purpose of this Stock Option Plan (this "Plan") is to advance the
interests of Allied Capital Corporation (the "Company") by providing to
directors of the Company and to officers of the Company who have substantial
responsibility for the direction and management of the Company with additional
incentives to exert their best efforts on behalf of the Company, to increase
their proprietary interest in the success of the Company, to reward outstanding
performance and to provide a means to attract and retain persons of outstanding
ability to the service of the Company. It is recognized that the Company cannot
attract or retain these officers and directors without this compensation.
Options granted under this Plan may qualify as "incentive stock options," as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").

2.  ADMINISTRATION

         This Plan shall be administered by a Compensation Committee (the
"Committee") comprised of at least two (2) members of the Company's Board of
Directors who each shall (a) be a "disinterested person," as defined in Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended, (b)
have no financial interest in grants of stock options to officers of the
Company under this Plan and (c) not be an "interested person," as defined in
Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "Act"),
of the Company. The Committee shall interpret this Plan and, to the extent and
in the manner contemplated herein, shall exercise the discretion reserved to it
hereunder. The Committee may prescribe, amend and rescind rules and regulations
relating to this Plan and to make all other determinations necessary for its
administration. The decision of the Committee on any interpretation of this
Plan or administration hereof, if in compliance with the provisions of the Act
and regulations promulgated thereunder, shall be final and binding with respect
to the Company, any optionee or any person claiming to have rights as, or on
behalf of, any optionee.

3.  SHARES SUBJECT TO THE PLAN

         The shares subject to option and the other provisions of this Plan
shall be shares of the Company's common stock, par value $1.00 per share
("shares"). Subject to the provisions hereof concerning adjustment, the total
number of shares which may be purchased upon the exercise or surrender of stock
options granted under this Plan shall not exceed 1,350,000 shares, which
includes all shares with respect to which options have been granted or
surrendered for payment in cash or other consideration pursuant to this Plan or
predecessor forms of this Plan. In the event any option shall cease to be
exercisable in whole or in part for any reason, the shares which were covered
by such option, but as to which the option had not been exercised, shall again
be available under this Plan. Shares may be made available from authorized,
unissued or reacquired stock or partly from each.

4.  PARTICIPANTS

         (a) Officers. The Committee shall determine and designate from time to
time those key officers of the Company who shall be eligible to participate in
this Plan. The Committee shall also determine the number of shares to be
offered from time to time to each optionee. In making these determinations, the
Committee shall take into account the past service of each such officer to the
Company, the present and potential contributions of such officer to the success
of the Company and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of this Plan; provided that the
Committee shall determine that each grant of options to an optionee, the number
of shares offered thereby and the terms of


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such option are in the best interests of the Company and its shareholders. The
date on which the Committee approves a grant of options to an officer of the
Company shall be the date of issuance of such option; provided, however, that
if (1) any such action by the Committee does not constitute approval thereof by
both (A) a majority of the Company's directors who each has no financial
interest in such action and (B) a majority of the Company's directors who each
is not an "interested person" [as defined in Section 2(a)(19) of the Act] of
the Company and (2) such approval is then required by Section 61(a)(3)(B)(I)(I)
of the Act, the grant of any option by such action shall not be effective until
there has been approval of such action by a majority of the Company's directors
who each has no financial interest in such action and a majority of the
Company's directors who each is not an "interested person" of the Company on
the basis that such action is in the best interests of the Company and its
shareholders, and the last date on which such required approval is obtained
shall be the date of issuance of such option. The agreement documenting the
award of any option granted pursuant to this paragraph 4(a) shall contain such
terms and conditions as the Committee shall deem advisable, including but not
limited to being exercisable only in such installments as the Committee may
determine.

         (b) Non-Officer Directors. A one-time grant of options in accordance
with the provisions of this paragraph (b) shall be made to each director of the
Company who is not an officer of the Company or of the Company's investment
adviser (a "non-officer director") who is serving at the later of (i) the date
on which the proposal to make grants of options to non-officer directors is
approved by the shareholders of the Company or (ii) the date on which the
issuance of options pursuant to this Plan to non-officer directors is approved
by order of the Securities and Exchange Commission pursuant to Section
61(a)(3)(B)(I)(II) of the Act. After the later of such dates, a one-time grant
of options in accordance with the provisions of this paragraph (b) shall be
made to each non-officer director [other than any non-officer director who
received a grant pursuant to the first sentence of this paragraph (b)] upon his
or her initial election as a director of the Company. Each grant pursuant to
this paragraph (b) shall award the non-officer director an option to purchase
ten thousand (10,000) shares at a price equal to the current fair market value
of the shares at the date of issuance of such option; provided, that if any
non-officer director then holds ten percent (10%) or more of the outstanding
shares, the exercise price of such option shall not be less than one hundred
ten percent (110%) of such current fair market value. The agreement documenting
the award of any option granted pursuant to this paragraph 4(b) shall contain
such terms and conditions as the Committee shall deem advisable; provided,
however, that any such option shall vest in three annual installments (so that
the recipient can first exercise the option with respect to not more than 3,333
shares on or after the date of issuance of such option, can exercise the option
with respect to not more than an additional 3,333 shares on or after the first
anniversary of the date of issuance of such option and can exercise such option
with respect to the all of the shares covered thereby on or after the second
anniversary of the date of issuance of such option).

         (c) General. Agreements evidencing options granted to different
optionees or at different times need not contain similar provisions.

5.  OPTION PRICE

         Shares shall be optioned from time to time at a exercise price not
less than the current fair market value [as defined in paragraph 15(d) of this
Plan] of the shares at the date of issuance of an option; provided, that the
exercise price of any option granted to a holder of 10% or more of the
Company's shares shall not be less than 110% of such current fair market value.

6.  OPTION PERIOD

         Each option agreement shall state the period or periods of time within
which the subject option may be exercised, in whole or in part, by the optionee
which shall be such period or periods of time as may be determined by the
Committee; provided, that the option period shall not exceed ten years from the
date of issuance of the option and shall not exceed five years if the option is
granted to a holder of 10% or more of

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the Company's shares.

7.  PAYMENT FOR SHARES

         Full payment for shares purchased shall be made at the time of
exercising the option in whole or in part. Payment of the purchase price shall
be made in cash (including check, bank draft or money order) or, if authorized
pursuant to paragraph 9 hereof, by a loan from the Company in accordance with
paragraph 9.

8.  TRANSFERABILITY OF OPTIONS

         Options shall not be transferable other than by will or the laws of
descent and distribution, and during an optionee's lifetime shall be
exercisable only by the optionee.

9.  LOANS BY THE COMPANY

         Upon the exercise of any option by an officer-optionee, the Company,
at the request of the officeroptionee, and subject to the approval of both (a)
a majority of the Company's directors who each has no financial interest in
such loan and (b) a majority of the Company's directors who each is not an
"interested person" [as defined in Section 2(a)(19) of the Act] of the Company,
on the basis that such loan is in the best interests of the Company and its
stockholders (whether such approval is by the Committee or otherwise), may lend
to such officer-optionee, as of the date of exercise, an amount equal to the
exercise price of such option; provided, that such loan (a) shall have a term
of not more than ten years, (b) shall become due within sixty days after the
recipient of the loan ceases to be an officer of the Company, (c) shall bear
interest at a rate no less than the prevailing rate applicable to 90-day United
States Treasury bills at the time the loan is made, and (d) shall be fully
collateralized at all times, which collateral may include securities issued by
the Company. Loan terms and conditions may be changed by the Committee to
comply with applicable IRS and SEC regulations.

10.  TERMINATION OF OPTION

         All rights to exercise options shall terminate sixty days after any
optionee ceases to be a director or an officer of the Company for any cause
other than death or total and permanent disability.

11.  RIGHTS IN THE EVENT OF TERMINATION OF SERVICE

         If an optionee's service as a director or officer is terminated for
any reason other than death or total and permanent disability prior to
expiration of his or her option and before such option is fully exercised, the
optionee shall have the right to exercise the option during the balance of the
60-day period referred to in paragraph 10.

12.  RIGHTS IN THE EVENT OF TOTAL AND PERMANENT DISABILITY OR DEATH

         If an optionee becomes totally and permanently disabled or dies prior
to expiration of the option without having fully exercised it, he or the
executors or administrators or legatees or distributees of the estate, as the
case may be, shall, have the right, from time to time within one year after the
optionee's total and permanent disability or death and prior to the expiration
of the term of the option, to exercise the option in whole or in part, as
provided in the respective option agreement.

13.  EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN

         Subject to any required action by the shareholders of the Company and
the provisions of applicable

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corporate law, the number of shares represented by the unexercised portion of
an option, the number of shares which has been authorized or reserved for
issuance hereunder, and the number of shares covered by any applicable vesting
schedule hereunder, as well as the exercise price of a share represented by the
unexercised portion of an option, shall be proportionately adjusted for (a) a
division, combination or reclassification of any of the shares of common stock
of the Company or (b) a dividend payable in shares of common stock of the
Company.

14.  GENERAL RESTRICTION

         Each option shall be subject to the requirement that, if at any time
the Board of Directors shall determine, at its discretion, that the listing,
registration or qualification of the shares subject to such option upon any
securities exchange or under any state or federal law, or the consent or
approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such option or the issue
or purchase of the shares thereunder, such option may not be exercised in whole
or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company. Subject to the limitations of paragraph 6, no option
shall expire during any period when exercise of such option has been prohibited
by the Board of Directors, but shall be extended for such further period so as
to afford the optionee a reasonable opportunity to exercise his option.

15.  MISCELLANEOUS PROVISIONS

         (a) No optionee shall have rights as a shareholder with respect to
shares covered by his option until the date of exercise of his option.

         (b) The granting of any option shall not impose upon the Company any
obligation to appoint or to continue to appoint as a director or officer any
optionee, and the right of the Company to terminate the employment of any
officer or other employee, or service of any director, shall not be diminished
or affected by reason of the fact that an option has been granted to such
optionee.

         (c) Options shall be evidenced by stock option agreements in such form
and subject to the terms and conditions of this Plan as the Committee shall
approve from time to time, consistent with the provisions of this Plan. Such
stock option agreements may contain such other provisions as the Committee in
its discretion may deem advisable.

         (d) For purposes of this Plan, the fair market value of the shares
shall be the closing sales price of the stock as quoted on the National
Association of Securities Dealers Automated Quotation System for the date of
issuance of such option, as provided herein. If the Company's shares are traded
on an exchange, the price shall be the closing price of the Company's stock as
reported in The Wall Street Journal for such date of issuance of an option.

         (e) Any option issued hereunder before January 1, 1987 shall not be
exercisable while there is outstanding any stock option which was granted
before the granting of such option to the same optionee to purchase shares of
the Company or of any corporation which (at the time of the granting of such
option) was a parent or subsidiary corporation of the Company, or any
predecessor of any of any such corporations.

         (f) (1) The aggregate fair market value (determined as of the date of
issuance of an option) of the shares for which any optionee may be granted
options before January 1, 1987 in any calendar year (under all incentive stock
option plans of the Company and its parent and subsidiary corporations) shall
not exceed $100,000 plus any unused limit carryover to such year, calculated in
accordance with the provisions of Section 422A(c)(4) of the Code as it existed
before enactment of the Tax Reform Act of 1986, P.L. No. 99-514.


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         (f) (2) The aggregate fair market value (determined as of the date of
issuance of an option) of the shares with respect to which an option, or
portion thereof, intended to be an incentive stock option and granted after
December 31, 1986 are exercisable for the first time by any optionee during any
calendar year (under all incentive stock option plans of the Company and
subsidiary corporations) shall not exceed $100,000.

         (g) All options issued pursuant to this Plan shall be granted within
ten years from the earlier of the date of adoption of this Plan (or any
amendment thereto requiring shareholder approval pursuant to the Code) or the
date this Plan (or any amendment thereto requiring shareholder approval
pursuant to the Code) is approved by the shareholders of the Company.

         (h) No option may be issued if exercise of all warrants, options and
rights of the Company outstanding immediately after issuance of such option
would result in the issuance of voting securities in excess of 20% of the
Company's outstanding voting securities.

         (i) A leave of absence granted to an employee does not constitute an
interruption in continuous employment for purposes of this Plan as long as the
leave of absence does not extend beyond one year.

         (j) Any notices given in writing shall be deemed given if delivered in
person or by certified mail; if given to the Company at Allied Capital
Corporation, 1666 K Street, N.W., 9th Floor, Washington, D.C. 20006; and, if to
an optionee, in care of the optionee at his or her last known address.

         (k) This Plan and all actions taken by those acting under this Plan
shall be governed by the substantive laws of Maryland without regard to any
rules regarding conflict-of-law or choice-of-law.

         (l) All costs and expenses incurred in the operation and
administration of this Plan shall be borne by the Company.

16.  AMENDMENT AND TERMINATION

         The Board of Directors may modify, revise or terminate this Plan at
any time and from time to time; provided, however, that no modification or
revision of any material provision of this Plan may be made without shareholder
approval except for such modifications or revisions which are necessary in
order to ensure the options issued as incentive stock options under this Plan
comply with Section 422 or any successor provision of the Code, applicable
provisions of the Act or any exemptive order therefrom issued to the Company in
connection with this Plan, Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended, or other applicable law. This Plan shall terminate
when all shares reserved for issuance hereunder have been issued upon the
exercise of options, by action of the Board of Directors pursuant to this
paragraph, or on February 16, 2004, whichever shall first occur.

17.  EFFECTIVE DATE OF THE PLAN

         This Plan shall become effective upon (1) adoption by the Board of
Directors and (2) approval of this Plan by the shareholders of the Company.

18.  AMENDMENT HISTORY
Date of plan adoption by the Board of Directors          May 6, 1983
Date of original plan approval by shareholders           December 20, 1983
Date of amendment adoption by the Board of Directors     November 12, 1987
Date of amendment adoption by the Board of Directors     February 15, 1990
Date of amendment approval by shareholders               May 17, 1990


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Date of amendment adoption by the Board of Directors     February 17, 1993
Date of amendment approval by shareholders               May 6, 1993
Date of amendment adoption by the Board of Directors     February 16, 1994
Date of amendment approval by shareholders               May 5, 1994
Date of approval of Securities and Exchange Commission   December 26, 1995
Date of amendment adoption by the Board of Directors     February 14, 1996


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