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The 100% Secret:
The Easiest Way to Make Money
in a Risky Stock Market
By Porter Stansberry
Stocks had just suffered a historic fall. On October 10, the Dow Jones Industrial Average closed one
of its worst weekly losses of all time 15.1%.
Panic tore through investors... The Chicago Board Options Exchange Volatility Index a measure of
fear in the market reached unprecedented highs.
Of course, wise investors... those who understand how to value securities... knew theyd simply never
see a better time to bloat their portfolios with cheap stocks. Investors ready with cash could load up on
the safe, industrial stalwarts that comprise the Dow... GE, Johnson & Johnson, DuPont, IBM, American
Express...
In the nearly six months following the panicked fall of 2008, the Dow headed straight down,
bottoming in mid-March (at around 6,550) before ebbing upward. Stock investments made during that
stretch might one day pan out for investors with the patience to wait for the market to recognize their
wisdom. But its impossible to know when that will happen. And few investors have the bull-headed
certainty in their decisions to hold out forever. Most will lose faith and cash out at a loss.
Meanwhile, one group of investors actually saw its capital grow during this period when all others
were losing theirs... During the same six months when the market fell 16.5%, investors following this
strategy which Ive called the 100% Secret watched their positions grow an average 44% every 90 days
an annualized rate of more than 178%.
These investors werent lucky gamblers, the kind who kick over that one-in-a-million penny stock
just before its shares explode. These investors were following a sound strategy that used rampant fear in
the marketplace to generate cash upfront for their investments.
Ive written this report to show you exactly how these investors generated such remarkable profits
during a historic market slump... More important, when the looming currency crisis reaches full bloom,
fear will rip through the stock market once again. You can use this strategy to make safe double- and
triple-digit gains without owning stocks.
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The Safest Income Youll Ever Make
The 100% Secret is more commonly called selling short-term put options or naked put selling...
The key to selling puts safely and profitably is knowing exactly the real risks in owning a companys
shares. Just like the insurance company needs to know the details of your home (square footage,
upgrades or renovations, what you paid for it, any valuables you keep there, etc.), we need to assure
ourselves the companies we sell puts on are fundamentally sound.
We wont insure just any stock. Were going to identify stocks we like and would want to own. Then,
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well insure them at a price they are unlikely to fall below. No matter what happens, we win. If the stock
falls, we buy a stock we wanted to own at a great price.
If the stock doesnt fall into our laps, we keep the
insurance premium free and clear. Two Key Points About Puts
Heres how it works...
Before you start selling puts, you need to
understand two critical points about how
An Outrageous Deal 72% in 12 Weeks they are traded:
During October 2008, some Stansberry & Associates First, one option contract is good for 100
subscribers did very well selling puts on the worlds shares. Lets say you sell a put for $2 that has
leading ratings agency, Moodys (NYSE: MCO)... a strike price of $15. Youll get $200 upfront
($2 x 100 shares). Youll also be obligated
At the time, all the major ratings agencies were to buy $1,500 worth of stock if the option
under intense scrutiny for their role in the mortgage/ is exercised. Two contracts would generate
credit collapse that devastated the economy... $400 and obligate you to buy $3,000 worth
of stock.
You see, during the mortgage bubble, firms like
Moodys and Standard & Poors had rated mortgage This is important to remember. Dont sell
securities as triple A which should never default puts on more shares than youre willing
even though they contained subprime mortgages. In to buy. If youre comfortable owning
retrospect, this was irresponsible, even stupid. But at 100 shares, sell one contract. If youre
the time, using the best computer models available, comfortable owning 500 shares, sell five
Moodys and other ratings agencies believed the contracts.
default rates in these securities would be below the
Second, your broker will want to make
amount of capital set aside to protect the triple-A
sure youre good for the stock purchase
portions of these bundled securities.
in case the shares are put to you. So hes
All the attention and criticism including going to require you keep a percentage
predictable demagoguery from Congress was of the potential obligation in an account
crushing Moodys stock price. The shares, which with him. That percentage is called a
had traded for more than $73 in early 2007, were margin requirement, and it usually equals
by October 2008 floundering around $20 a 72% about 20% (though it can vary among
drubbing. brokerages).
While the criticism of Moodys may have been If youre going to sell one put with a $15
warranted, the draconian selloff was not. strike price ($15 x 100 shares = $1,500
obligation), your broker will ask you put
Moodys is a 100-year-old company that provides up about $300 ($3 per put) in margin. Of
ratings on fixed-income securities, debt instruments, course, if the puts expire worthless, youll
and corporations. It covers 11,000 corporate issuers keep your margin... and the premium.
of debt and about 72,000 structured financial
That margin represents your capital at risk,
obligations, including things like mortgage-backed
and its how we calculate gains. So if you
securities. It has offices in 33 countries and employs
received $2 in premium upfront and put
about 10,000 people worldwide.
down $3 in margin, youll record a 67% gain
There are two keys to understanding this if the options expire worthless.
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business. First, its essentially impossible to issue debt without a rating from Moodys, and the issuer
must pay for the rating. As a result, Moodys makes money both by selling information to subscribers
and by selling ratings to debt issuers. Second, Moodys has a wide economic moat because of its sterling
reputation and because the government regulates these firms. To issue a debt security, you have to receive
at least one rating (and typically two) from one of the nationally recognized ratings firms. Moodys and
Standard & Poors are widely considered the two leading firms.
We knew at the time Octobers storm would pass without hurting Moodys or the long-term
quality of its brand. Businesses and governments would continue selling bonds, no matter how bad the
economy got. And theyd need Moodys to rate those bonds. Moodys would not be replaced by some
new government agency. So we could be confident Moodys was in no danger of going out of business.
(Notably, rating a bond implies no guarantees or fiduciary obligations. People who lost money on
mortgage bonds cannot sue Moodys.)
And we knew this... In the preceding quarter during the worst underwriting period in memory
Moodys still made more than $60 million in cash. It remained an incredibly profitable business (profit
margins above 20%) that required almost no capital investment to grow. And Warren Buffett owned
nearly 20% of the stock.
Frankly, regardless of the credit mess, we knew Moodys remained one of the top 20 businesses in the
world the kind of stock you hold forever.
If youd bought MCO shares on the day I wrote about it (October 22, 2008), you would have made
about 7% over the next 12 weeks as the shares traded
essentially sideways (assuming you didnt get scared
out of the position when it cratered to around $15.60
Three Major Factors that Deter-
in late November). mine the Price of Options
That performance isnt terrible, given everything 1. Distance of the Strike Price from the
else that was going on in the market. Market Price: For out-of-the-money
options, the closer the market is to the
But subscribers who followed my options strike price (the closer the option
recommendation earned nearly 72% on their capital is to being in the money), the more
at risk over the same period... expensive the option will be.
You see, in addition to beating down the share 2. Time Until Expiration: The longer an
price of Moodys, the negative publicity drove up option has to work, the more expensive it
the premium investors could receive by selling the will be. Extra time simply gives the stock
companys puts. Specifically, in mid-October, the more time to make the move. An option is
Moodys January 2009 puts with a strike price of $15 known as a wasting asset. It loses value
traded for about $2.15. with the passage of time.
Selling that put would have given you $2.15 per 3. Volatility: The more volatile the stock, the
option and obligated you to purchase MCO shares for more expensive the option will be. Because
$15 each if the stock traded that low by January 16, volatile stocks have greater potential
2009 (the day the options expired). for large price moves, theres a higher
probability that an out-of-the-money
On October 22, I advised readers to take that deal. option will at some point be in the money.
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Specifically, I told them to:
Sell the MCO January 2009 $15 put (MCOMC.X) for no less than $2. (In fact, most readers
received closer to $2.15 per option).
At that point, the trade could have worked out in one of three ways:
If MCO traded for more than $15 on January 16, 2009, the options would expire worthless. We
would keep the $2.15 premium and have no more obligation to the stock a total win on our investment,
without ever owning the stock. We kept the entire premium 100% of it. Thats why Ive termed this the
100% Secret.
If the stock traded between $12.86 and $15, wed have to buy the stock at $15 a share. But since we
would still keep the $2.15, our net entry point would be $12.85, therefore we would be up on the position
and holding a Tiffany stock at Zales prices.
If the stock traded for $12.85 or less, wed have to buy the shares at $15, and wed be down on the
position. This seemed highly unlikely since $12.85 represented a 40% discount from the stocks already
oversold price...
And even if the trade broke that way, wed be holding a world-class stock for about 74% less than
my estimate of the companys intrinsic value (which I calculate based on 20 times my estimate of the
companys annual free cash flow).
On January 16, 2009, Moodys closed at $21.39 well above our strike price. We kept the $2.15
premium we received 12 weeks earlier, booking a 71.7% return on our $3 margin.
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future. But selling puts generates income and, at the same time, hedges our investments by getting us
much lower entry prices on any stocks we end up buying.
Selling insurance and collecting premiums is a much safer and higher-percentage speculation than
simply buying stocks outright. In fact, if I do my job perfectly as an analyst, we shouldnt actually buy any
stocks well simply collect premiums and earn about 50% on the capital were holding. All we have to
do is be prepared to buy if the time comes...
And if we do end up converting one or two stocks, thats fine, too. Our entry prices will be so low we
wont have much risk at all.
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