A Secret Risk Free Way to Invest in the Stock Market

March 23, 2005

By Tim McMahon

 One of the biggest problems with investing in the stock market is that there are no guarantees. You can do your homework pick a likely stock and watch as it falls to oblivion.

 Has this ever happened to you? You subscribe to a newsletter because the magnificent advertisement makes it sound like you can’t possibly lose by following their advice. But as soon as you put your money in somehow their advice stops working?

 Well now there is a solution. And believe it or not it has been around for a few years but most investors have never heard of it. This “secret” investment lets you get all the gains of the market with none of the losses. Sounds almost too good to be true doesn’t it?

 Fortunately for us it isn’t too good to be true. Here is how it works. If you invested 80% of you money in Zero Coupon Bonds and 20% in options you could design a system where at some point in the future the Bonds would be worth the full value of your initial investment. That is because Zero Coupon Bonds are bought at a discount to “Par” value. So if they are selling for $8 today at some point they will mature and be worth $10.  So this is how you get your “Guaranteed” return.

 Even if the options turn out to be 100% worthless at the final date you will still have all your money back.  But because of the leverage of options, if  the market that the options are based on increases 10%, the options will increase enough to make your entire investment increase 10%.

 Now you might be thinking that’s fine, but I don’t know anything about options or perhaps you just don’t want to be bothered. Well now you don’t have to be. A couple of years ago Merrill Lynch developed an investment that does all of this for you in a simple single investment. They are called “MITTS” which stands for Market Index Target-Term Securities.

 “MITTS”  are available for a variety of indexes and expiration dates including all of the Major indexes like the Dow and the NASDAQ but even more than that, they are available for many other indexes too, like the Nikkei, the Russell 2000, Biotech, Defense, Energy, EuroFund, etc.

 “MITTS” trade like ordinary stocks meaning that there is a quote and your broker can buy them and sell them for you and like “Zeros” if you sell before maturity it is still possible to lose money but they are guaranteed if held to maturity.

 Let’s look at a specific example. Suppose you wanted to invest in the BioTech industry. You could a BioTech "MITTS" symbol (BMA). On the day that Merrill Lynch created it, it was worth $10. in September of 2005 Merrill Lynch has the right (but not the obligation) to redeem it for $12.60. If they don’t redeem it sooner on 5/4/09 it expires with the guaranteed value of $10. The BioTech index that they are measuring against was at 436.49 on the day they issued it and if the index goes up the "MITTS" goes up with it.

 If however the index goes down you can lose money in the short run (at least on paper) but knowing that you are guaranteed to break even might make it easier to hold on for the long run.

 Another interesting way to play "MITTS" is to buy them on the open market after they are issued and so your holding period would be shorter. (FML) an S&P500 "MITTS" expires on 3/27/06 so as of this writing it has almost exactly 1 year to go. Because the index is down from where it was when the "MITTS" was created you can buy this "MITTS" for $9.60 guaranteeing you a minimum $0.40 gain over the next year $0.40 of  $9.60 is 4.2% not too bad for a guaranteed return. Plus if the S&P goes above 1262.14 you will be entitled to the market gain as well. Currently the S&P 500 is trading at 1169.31

 The only way you can lose with "MITTS" is if you buy after the initial issue and the market goes down from there. Suppose the above S&P index "MITTS" was trading at $10.60 instead of $9.60 and over the next year the index went down. You might end up only getting $10 at the expiration date.

 The only other ways you could lose would be if the US Government defaulted on the underlying Zero Coupon bonds or if Merrill Lynch went bankrupt.

 All in all "MITTS" are an interesting low risk way of investing in the market. For more information about which "MITTS" are available you can go to http://www.quantumonline.com Quantum On Line requires that you register but it is free and they have quite a bit of information. Finding the "MITTS" is a bit difficult it is listed under the Merrill Lynch symbol. You can find them all here:

http://www.quantumonline.com/ParentCoSearch.cfm?tickersymbol=MER

 So reduce your risk and invest using "MITTS".

Tim McMahon
Editor
Financial Trend Forecaster

Disclaimer: This article is for informational purposes only. Nothing in this article can be construed as individual investment advice. The author may hold shares discussed.  

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