How bad will it get before you realize there's a real problem?...

How bad will it get before you realize there's a real problem?... How to maximize distressed-equity opportunities... Understanding risk and profiting from volatility...

I (Porter) worry that you're still not paying attention...

I began warning about risks to high-yield bonds in May 2013. I knew that yields were far too low (less than 5%). I've frequently repeated those warnings ever since.

My most urgent warning came in the September 29 Digest...

There's something very serious I need to discuss with you... Read the following very carefully. Don't go to bed tonight until you understand the main points I'm making below. Don't go to bed tonight until you've adjusted your affairs accordingly... We're approaching a critical point in the markets... a crisis that will lead to the greatest legal transfer of wealth in history. Millions of people are about to be wiped out. But you don't have to be one of them...

The high-yield credit markets, commodity stocks, energy stocks, biotech stocks, and transportation stocks have shown significant weakness.

But the real trouble lies within the credit markets... Today, for the first time ever, more than half of the cash held by U.S. corporations is invested in other corporate bonds. Here's the most important warning I can give: If you own any high-yield bonds through mutual funds or exchange-traded funds (ETFs), sell right now. Do not wait. There's going to be a massive crisis.

As I further explained, the biggest problem is liquidity. When bonds start going bad, few investors want to buy them. When a default cycle begins, people always rush to the exits.

Just a few weeks after my most explicit warnings, the exact problems I described have started to emerge. Bond fund after bond fund is experiencing huge waves of selling pressure and, for a handful of funds already, they're responding by erecting "gates" – making it impossible for investors to get their money out.

This is a huge problem... And trust me, it's going to get much, much worse.

Anticipating this crisis, my team and I have been shorting leveraged financial stocks in my Investment Advisory newsletter. We've launched a distressed-debt research service (Stansberry's Credit Opportunities). We hope to capitalize on the sometimes gross mispricing that can occur in distressed corporate bonds. And finally... I've embarked on a five-part Digest series about how to make money in distressed-equity markets.

Please listen to me... We're approaching a huge bear market. As I wrote yesterday, there's nearly $2 trillion worth of stocks whose bonds are trading for less than $0.80 on the dollar already. All of these stocks could go to zero if these bonds default.

Here's the problem: I know the overwhelming majority of my subscribers won't short stocks no matter what. As a result, their portfolios aren't hedged at all to these massive risks.

If you've never shorted a stock before, go read our report on Santander Consumer USA (SC) – which we've "unlocked" right here – and, if you agree with our thinking, just sell one share short. Any time you're doing something new, start small. Learn how to profit from companies that are definitely going to collapse in the ongoing credit-default cycle. That's a great way to protect yourself. Don't just watch your savings evaporate. Do something. And do it now.

Likewise, I know 95% of my subscribers will never understand or profit from the tremendous gains we will surely find in distressed debt over the next 18 to 36 months. It's just too difficult for most people to take the time to learn a new market (like corporate bonds).

But... I can't help that.

I can only help people who are ready to help themselves. You do not have to be a victim this time. You have a great, talented team of honest analysts on your side, who come to work every day and try to figure out how to educate and motivate you. Just follow our lead.

Today, I just want you to learn one thing: The key to making money during distressed markets is to generate large amounts of income.

With distressed bonds, that means getting current yields of 20% or more. As I explained yesterday, with equities, that means selling puts when volatility (the "VIX") is up and premiums are rich.

Having this cash (being liquid) when the market is panicking is the whole trick. No one else will have cash. Everyone else will be panicking and frozen. You will have plenty of money to speculate.

But... which stocks should you sell puts against?

I'll help you make a list. It's a group of companies you would be happy to own anyway... but that you don't actually plan to buy. Instead, on days when the market is falling and volatility spikes, you're going to sell puts on these stocks. And you're going to use a Level IV margin account, so you will only have to put up 20% of the capital for these trades.

We've picked these stocks because they're high-quality companies with volatile share prices. And by selling out-of-the-money puts (with strike prices between 5% and 10% below the share price), you can still generate substantial sums of income without any realistic chance of being put (having to buy) the shares.

That might sound difficult or confusing... but it's as easy as just buying a share of stock if you're using a good broker. (To learn more, attend our upcoming free webinar. Sign up here.) If you've never done it before, just try it. Start small.

As you know, this is exactly what we did – very successfully – back in 2009. I showed you yesterday how our put-selling campaign during the last crisis in 2009 generated a win percentage of 90% and average gains on margin of 54%.

We generated huge amounts of profits simply by selling puts. But there's something we didn't do back then that could have made our profits astronomical. We could have recommended using the income we produced to buy call options. That's what we've been doing in our Stansberry Alpha advisory.

A call option is a contract that you can buy that gives you the right (but not the obligation) to buy 100 shares of stock, at a fixed price (the strike price), for a limited period of time. What call options really do is allow you to hold huge blocks of stock... and buy them if they go way up in price.

What's so powerful about pairing selling puts with buying calls is that, because of human nature, you can generate more income buying puts than you'll have to spend to buy calls. In other words, this kind of trading will allow you to make significant amounts of income, while positioning you to make huge gains when (or if) stocks rebound.

How's that possible? Well, let's review what happened with one of our recent Stansberry Alpha recommendations...

In July 2014, we recommended opening an Alpha trade on discount retailer Dollar General (DG). We had already recommended the stock in Stansberry's Investment Advisory and we knew the stock was cheap at around $55 per share. We believed there was tremendous upside in the stock, so we recommended the following trade...

Buy, to open, the Dollar General (DG) January 2016 $65 call for about $4, and sell, to open, the Dollar General (DG) January 2016 $55 put for about $6.60.

Selling a January 2016 $55 put for around $6.60 and buying a January 2016 $65 call for around $4 created a $2.60 "spread," which reflects the Alpha anomaly at the heart of our strategy. Remember, each option contract represents 100 shares, so investors who followed our advice would have received a $260 net credit for every option pair they traded.

Here's where the potential of our Alpha strategy pays big rewards...

This past October, DG shares were trading around $66, so we recommended closing the trade. At the time, the $65 calls were trading for about $5 and the $55 puts were around $0.65. That provided a net credit of $4.35 to close the position. Adding that to the $2.60 net credit we received for opening the trade, our total return was $6.95. That represented a 63% return on margin. For comparison, the S&P 500 returned just 3% (including dividends) over the same period.

This strategy works even better when equity markets are distressed because you can generate much more income with put selling during those periods. But the best part of this strategy might not be readily apparent...

The best part is that you're going to make money almost every time because of the income you generate from selling puts. Using this premium to buy calls, you don't have to worry about whether or not the calls expire worthless (as they sometimes will).

I personally can't tolerate the risk of buying calls with my own money. But using part of your put premiums? Who cares? If it works out, you'll make a veritable fortune. If it doesn't, it hardly matters, because you can still book a profit from the premium you received by selling the puts.

In August 2013, we recommended opening an Alpha trade in global commodities giant Freeport-McMoRan (FCX). At the time, shares traded around $30.50. We recommended selling the January 2015 $29 put for around $4.25 and buying the January 2015 $37 call for about $1.95. This created a net credit of $2.30. Remember... options contracts control 100 shares, so investors who followed our advice received $230 per option pair traded.

Over the following several months, shares climbed to around $38 per share before heading into a dramatic decline. In October 2014, FCX shares fell to $28. We recommended closing the position to avoid losses. The put was trading for $2.05, while the call had declined to $0.02. It cost $2.03 to close the position. But because we had received a net credit of $2.30 for opening the trade, investors still collected $0.27 per option pair traded, a small 5% return on margin.

In this case, even though the shares had fallen 7% (from around $30.50 to $28), our Stansberry Alpha subscribers still made money. This is what we mean when we say our Alpha strategy allows you to enter a position with less risk than buying the shares outright.

So here's our plan: When volatility spikes, we'll sell puts on a select group of stocks whose shares we've picked because they're both safe and volatile. Using this income and margin from our brokers (again, you'll need to have a Level IV margin account), we will find call options on stocks we think are poised to rebound massively from the correction.

If we're right (and I believe we will be right most of the time), we'll earn huge profits. And when we're wrong (and we will be wrong sometimes), we'll only end up losing money that other investors gave us.

Why would you speculate any other way? You don't have to. Tomorrow, I'll show you just how easy this can be with a current, real example.

I encourage you to print out and reread the put-selling Digests I've written so far (Part I and Part II), and study tomorrow's and Thursday's Digests, too.

Then be sure to join us Thursday night for a live webinar, where I'll discuss this strategy in greater detail. Again, this webinar is completely free. Just click here to register.

New 52-week highs (as of 12/14/15): short position in iShares MSCI Canada Index Fund (EWC), Public Storage (PSA), and short position in Santander Consumer USA (SC).

A busy day in today's mailbag. Send your questions – including any questions on this put-selling series so far – to feedback@stansberryresearch.com.

"Hi Porter, as I dug into Friday's Digest, and then again today, I was thinking again about how thankful I was to discover your teachings. Not sure what to make of folks like Art and Fred, but you know better than I that there's a huge number of folks who actually appreciate your work very much. Cheers to you." – Paid-up subscriber B.T.

"Porter, I cringe when I read some of the comments you get from subscribers...I guess you do too. There seems to be a growing problem with our culture where some people want to be 'taken care of' instead of seeing the opportunities they have before them, but then 'a little learning is a dangerous thing.' Over the years I've subscribed to a number of newsletters / investor services and find yours far and above the best! I want to thank you and your staff, esp. Doc for what I've learned so far...the opportunities keep me learning. 'Endeavor to persevere,' you are getting through to some of us. Thanks, again for the help." – Paid-up subscriber Ed W.

"I'm drinking the Kool-Aid. Bought some January HYG puts with a $75 strike price for seventeen cents several weeks ago. They're up 500% today so I sold half. Now playing on house money. Also bought a few Dec 18 HYG $80 puts for 94 cents. They're in the money and worth 200%. Planning to sell Thursday before they exercise. I never buy enough of my winners. Thanks for the strategy." – Paid-up subscriber Russell R.

Brill comment: Russell, we're glad you made some money with the January $75 puts... but make no mistake, we never recommended buying puts on HYG. In fact, unless you're an experienced trader, we would almost never recommend buying puts outright... and especially not when volatility is already elevated like it is now (which makes options premiums higher as well).

As we've explained, we believe the trend in "junk" bonds is down, but there will be gut-wrenching bear-market rallies along the way. And today could be the start of one... As we write, HYG is up nearly 2%. The December 18 HYG $80 puts you bought for $0.94 are now trading for less than $0.65... a 30% loss. Unless HYG quickly reverses and heads lower again, it's likely those puts will expire worthless.

Fortunately, it sounds like you kept your position size small with the December puts... so consider this loss an inexpensive lesson on the risks of gambling with options. And we urge you to reread this week's Digest series – and attend Porter's free webinar on Thursday – to learn a much better way to profit from options.

"Hello, I have subscribed for the [distressed bond] service and have been reading the five part [bond] series again to capture all the necessary details. The second installment dated November 6th mentioned the webinar. I travel quite extensively and missed the webinar. Is the webinar on-line where I can review it as well? Thanks." – Paid-up subscriber Rod

Brill comment: Porter's webinar is included as part of your Stansberry's Credit Opportunities subscription. You can find it on the "Webinars and Videos" page when you log into your account.

We've also just added it to the Stansberry Research Education Center, where it is available for all readers to view. You can find it right here.

Regards,

Porter Stansberry

Miami, Florida

December 15, 2015