Does such an investment exist where you can not lose? Most investors have never heard of this elusive stock investment. Stock investors have been looking for a “Holy Grail” investment strategy where they can make money on the markets without having any risks of losing. This is an investment that lets you get all the potential markets gain and none of the losses.

This “secret” investment/strategy does exist and it has been around for a number of years and being traded by those in the know. If this sounds too good to be true, then read on; the secret will be revealed.

The investment is called “MITTS”, otherwise known as Market Index Target-Term Securities and was developed by Merrill Lynch which employs this secret strategy to guarantee a potential return without any losses. Merrill Lynch made it easier for the investor to take part in the investment without having to actually do the work of setting up the strategy.MITTS trades just like ordinary stocks on the markets (AMEX/NYSE) where they are quoted and can be bought or sold instantly through your broker. Keep in mind that MITTS comes with different expiration dates, so they need to be held until maturity. Sell them before then, and some losses may incur.

This special security is available for a number of stock market indexes like the DOW, NASDAQ, NIKKEI and Russell 2000. MITTS are also available for different sectors and regions of the world; for example, Technology, Biotech, Energy, Defense or Europe and the Pacific etc. The types and maturity dates available depends on when they were issued by Merrill Lynch. Let’s take a look at an example of a MITTS to see how you can not lose.

On March 25, 2002, the Russell 2000 MITTS Securities (AMEX: RRM) were priced for initial sale to the public at a price of $10 per share and the Russell 2000, the U.S. small-cap index, was at 496.39. This is the “starting value” or benchmark in which Merrill Lynch uses to calculate the Supplemental Redemption Amount paid to RRM shareholders at the maturity date on March 30, 2009. Also used in this calculation is the closing index value that is first adjusted with an “Adjustment Factor” that decreases the actual closing value.

“The “Adjustment Factor” is a fixed percentage equal to 2.25% per year and will be prorated
based on a 365-day year and applied over the entire term of the MITTS Securities on each calendar day to reduce the closing values of the Russell 2000 Index used to calculate the Supplemental Redemption Amount during the Calculation Period.” -from RRM Prospectus

Examples

Here are two examples of Supplemental Redemption Amount calculations:

Example 1 —The Russell 2000 Index, as adjusted, is below the Starting Value at maturity:

• Starting Value: 496.39
• Hypothetical average closing value of the Russell 2000 Index at maturity: 521.21
• Hypothetical Adjusted Ending Value: 445.14
• Supplemental Redemption Amount (per unit) = $10 × (445.14 – 496.39 / 496.39 = 0
• Total payment at maturity (per unit) = $10 + $0 = $10
• (Supplemental Redemption Amount can not be less than zero)

Example 2 —The Russell 2000 Index, as adjusted, is above the Starting Value at maturity:

• Starting Value: 496.39
• Hypothetical average closing value of the Russell 2000 Index at maturity: 992.78
• Hypothetical Adjusted Ending Value: 847.93
• Supplemental Redemption Amount (per unit) = $10 × (837.93 – 496.39) / 496.39 = $6.88
• Total payment at maturity (per unit) = $10 + $6.88 = $16.88

This means if the index doubles to 992.78, the MITTS will be worth $16.88 at maturity which is a 68.8% return on investment. However, even if the index declines over its lifetime, Merrill guarantees that the shareholder will not receive less than $10 per share at maturity. Provided that you pay $10 or less when you bought the MITTS, you have the unlimited upside of the index, but with no risk to principal.

There are a couple of situations in which you can guarantee a profit even if the index had declined at maturity. If you look at the current RRM chart for example, had you waited and bought the MITTS when it hit an $8 low a few months after it was initially offered, you would make a $2 dollar profit because of the $10 guarantee at maturity. You can also make a quicker guaranteed return if you buy MITTS valued below its first initial offering and that are about to mature. The returns may be lower in this situation, but it’s like getting some free cash in your pockets.

So how does Merrill Lynch pull off this guarantee you may be asking? It is really quite simple and an ordinary investor can do the same. This is how it works. A percentage of the proceeds from the sale of the initial offering of a MITTS is used to buy long-term index options that locks in the increase of the index over the life of the security. The rest of the balance is then used to purchase “zero- coupon” bonds that guarantees the principal at maturity. It is about a 80% bonds to 20% index options ratio.

The strategy is designed so that when the Bonds matured at some point in the future, they would be worth the full value of the principal investment. Zero-coupon bonds are bought at a discount to its par value. You could buy them for $8 today and at maturity they will be worth $10. At maturity, the options could be worthless but you can still get all your money back because of the bonds “guaranteed”. If however, the index that the MITTS are based on has increased at maturity, the value of the options will also increase to obtain a profit on the initial investment. You have a zero downside and an unlimited upside.

Because the MITTS are based on various market indexes and regions of the world, you can hedge your bets by buying a balanced portfolio of MITTS. No matter what happens in the markets or regions of the world, some of the MITTS will be profitable and the others just break even. The S&P may fall, but the NIKKEI and Eurofund may rise or vice versa.

Here’s a list of some MITTS available as of 10/05/2007:

Symbol	Name	Last Trade	Exchange
NOW	AIG NIKKEI 225 MITTS	9.52	ASE
DWMT	DOW JONES MITTS 2010	12.32	NGM
MTDB	ML DJ MITTS 1/09	11.96	NGM
MKO	ML DJIA MITTS 7/09	13.81	ASE
MTDW	ML DJIA MITTS 9/08	13.60	NGM
DFM	ML MITTS AMEX DEF ID	12.44	ASE
EUF	ML MITTS USD/EUR 8/05	11.97	ASE
NKS	ML NIKKEI 225 MITT	11.11	ASE
MNNY	ML NIKKEI 225 MITT	14.62	NGM
MTNK	ML NIKKEI 225 MITT	14.67	NGM
RRM	ML RUSSELL2000 MITTS	14.21	ASE
MCP	ML S&P 500 MITTS	13.93	ASE
MLW	ML S&P 500 MITTS	13.51	ASE
MTSM	ML S&P 500 MITTS	13.12	NGM
MKP	ML S&P 500 MITTS	14.05	ASE
SPPX	ML S&P MITTS 08	13.37	NGM
MSPX	ML S&P500 MITTS	13.38	NGM
MTSP	ML S&P500 MITTS 08	11.48	NGM
MTTX	S&P 500 MITTS	12.44	NGM
MTTT	S&P 500 MITTS	11.74	NGM

As part of a diversified investment portfolio, you should take a closer look at MITTS to see if they fit into your strategy. Go ahead, you can’t lose.

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