STANSBERRYS INVESTMENT ADVISORY

RESEARCH REPORT

The 100% Secret:

The Easiest Way to
Make Money in a
Risky Stock Market

Stansberry &Associates
1217 Saint Paul Street
Baltimore MD 21202 USA
www.StansberryResearch.com

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 The 100% Secret:
The Easiest Way to Make Money
in a Risky Stock Market
By Porter Stansberry

Think back to October 2008...

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...

And the market rewarded their fearlessness with negative balances.

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.

Let me show you how its done...

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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...

Many people think of naked put selling as

wildly risky... almost disreputable. Nothing could
be farther from the truth. The fact is most people
misunderstand and misuse the strategy. Done right,
its the safest, most profitable income-generating
strategy around. You can easily return more than 50%
in a year, while putting little capital at risk and never
owning shares of stock.
Selling puts is a strategy in which you basically
get paid for agreeing to buy a stock at a specified price
at some point in the future. Its like youre insuring
shares held by someone else... A panicky investor
wants to know he can sell his shares at a set price no
matter how low they fall on the stock market. Youre
selling him that insurance...
Its a lot like buying and selling homeowners
insurance... When you buy homeowners insurance,
you essentially buy the right to sell your house back to
the insurance company for an agreed on value under
specific conditions (e.g. after catastrophic damage)
for a limited period of time. By accepting your money,
the insurance company has taken on an obligation
to buy your house back under the same terms. The
longer your policy has to run, the more the insurance
company will charge you. A six-month policy costs
less than a 12-month policy. It works exactly the same
way with put options. The longer its good for, the
more it costs.
When you sell puts, youre acting like the
insurance company... If the stock declines (the house
burns down), youll buy it at the bargain-basement
price. If the stock doesnt decline to the agreed-upon price, then you keep the option premium as a profit
(unlike the company that insures your home, well get all of our premium upfront).
A Brief Options Glossary
Underlying Instrument: The stock, stock
index, or any other financial instrument that
you have the right to buy and sell.
Premium: The price of the option.
Expiration Date: Options expire on the
third Friday of the month.
Exercise: When a put buyer exercises
his option, he engages his right to sell the
underlying instrument at the strike price.
Strike Price: The price at which you can
exercise your option. This price is based
on the underlying instrument. When
you sell a put option, you are required to
buy shares at the strike price, if the buyer
exercises his option.
In the Money: Puts are in the money if
the price of the underlying instrument is
LOWER than the strike price. (A put with a
$20 strike price is in the money with the
stock at $19.)
Out of the Money: Puts are out of the
money if the price of the underlying
instrument is HIGHER than the strike price.
(A put with a strike price of $20 is out of
the money if the stock is at $25.)

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.
Heres how it works...
An Outrageous Deal 72% in 12 Weeks
During October 2008, some Stansberry & Associates
subscribers did very well selling puts on the worlds
leading ratings agency, Moodys (NYSE: MCO)...
At the time, all the major ratings agencies were
under intense scrutiny for their role in the mortgage/
credit collapse that devastated the economy...
You see, during the mortgage bubble, firms like
Moodys and Standard & Poors had rated mortgage
securities as triple A which should never default
even though they contained subprime mortgages. In
retrospect, this was irresponsible, even stupid. But at
the time, using the best computer models available,
Moodys and other ratings agencies believed the
default rates in these securities would be below the
amount of capital set aside to protect the triple-A
portions of these bundled securities.
All the attention and criticism including
predictable demagoguery from Congress was
crushing Moodys stock price. The shares, which
had traded for more than $73 in early 2007, were
by October 2008 floundering around $20 a 72%
drubbing.
While the criticism of Moodys may have been
warranted, the draconian selloff was not.
Moodys is a 100-year-old company that provides
ratings on fixed-income securities, debt instruments,
and corporations. It covers 11,000 corporate issuers
of debt and about 72,000 structured financial
obligations, including things like mortgage-backed
securities. It has offices in 33 countries and employs
about 10,000 people worldwide.
There are two keys to understanding this
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Two Key Points About Puts
Before you start selling puts, you need to
understand two critical points about how
they are traded:
First, one option contract is good for 100
shares. Lets say you sell a put for $2 that has
a strike price of $15. Youll get $200 upfront
($2 x 100 shares). Youll also be obligated
to buy $1,500 worth of stock if the option
is exercised. Two contracts would generate
$400 and obligate you to buy $3,000 worth
of stock.
This is important to remember. Dont sell
puts on more shares than youre willing
to buy. If youre comfortable owning
100 shares, sell one contract. If youre
comfortable owning 500 shares, sell five
contracts.
Second, your broker will want to make
sure youre good for the stock purchase
in case the shares are put to you. So hes
going to require you keep a percentage
of the potential obligation in an account
with him. That percentage is called a
margin requirement, and it usually equals
about 20% (though it can vary among
brokerages).
If youre going to sell one put with a $15
strike price ($15 x 100 shares = $1,500
obligation), your broker will ask you put
up about $300 ($3 per put) in margin. Of
course, if the puts expire worthless, youll
keep your margin... and the premium.
That margin represents your capital at risk,
and its how we calculate gains. So if you
received $2 in premium upfront and put
down $3 in margin, youll record a 67% gain
if the options expire worthless.
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
in late November).
That performance isnt terrible, given everything
else that was going on in the market.
But subscribers who followed my
recommendation earned nearly 72% on their capital
at risk over the same period...
You see, in addition to beating down the share
price of Moodys, the negative publicity drove up
the premium investors could receive by selling the
companys puts. Specifically, in mid-October, the
Moodys January 2009 puts with a strike price of $15
traded for about $2.15.
Selling that put would have given you $2.15 per
option and obligated you to purchase MCO shares for
$15 each if the stock traded that low by January 16,
2009 (the day the options expired).
On October 22, I advised readers to take that deal.
Three Major Factors that Deter-
mine the Price of Options
1. Distance of the Strike Price from the
Market Price: For out-of-the-money
options, the closer the market is to the
options strike price (the closer the option
is to being in the money), the more
expensive the option will be.
2. Time Until Expiration: The longer an
option has to work, the more expensive it
will be. Extra time simply gives the stock
more time to make the move. An option is
known as a wasting asset. It loses value
with the passage of time.
3. Volatility: The more volatile the stock, the
more expensive the option will be. Because
volatile stocks have greater potential
for large price moves, theres a higher
probability that an out-of-the-money
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).

This was an outrageous deal for us.

And it turned out as well as we could have hoped...

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.

Almost No Way to Lose Money

The Moodys example also underscores the real
beauty of selling puts... We dont have to be exactly
right about how or when a stock will rebound...
Many factors work in our favor, so even if the shares
stagnate, well still profit.
We dont have to be right about the stock price
rising weve sold out-of-the-money options, so
were safe as long as the stock doesnt completely
tank. And we dont have to be right forever just for
two or three months (our obligation to buy expires
with the option).
Selling puts gives us huge odds in our favor. Its,
of course, possible to lose money on the deal. Every
investment carries risk, and no one can predict the
Call Your Broker
If youve never bought or sold puts before,
ask your broker for help setting up any
trades we make.
And before trying to put on any trades,
youll need to authorize your brokerage
account for trading options. This is an
easy process. Your broker can provide you
a standardized options agreement. Simply
sign the form, and your account should be
approved immediately.

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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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1217 St. Paul Street
Baltimore, MD 21202
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