Hey @sinany!
Wow, that’s some straight up nonsense. So let me try to get this straight.
- QQQ is an ETF that tracks the NASDAQ 100.
- A triple leveraged version of QQQ is one that borrows money to 3x amplify the swings of QQQ.
- SQQQ is a 3x leveraged INVERSE ETF. So when QQQ goes up 1%, generally SQQQ will go down 3%.
- Leveraged funds slowly leak value over time due to “leverage decay” since, among other things, there’s an internal expense to borrow the money to achieve the leverage
- Your friend bought “puts” on SQQQ. Which basically means, if SQQQ goes DOWN (because the market went up) then his bet will pay off.
- He thinks the leverage decay will cause SQQQ to always go down.
- Your friend thinks the above scheme is guaranteed money.
Um… yeah. That’s not going to work. One of PFC’s Principles is “Simple is better than complex”. Not for ease of use (although it is easier) but because it makes the individual investor more money. Your friend is caught in some crazy wall street carnival trap. Everyone in that crazy chain above is making money. The ETFs charging the fees, the broker getting transactional fees on the options, the lender profiting off the leveraged fund, the algorithmic traders (as you wisely pointed out) who are instantly capitalizing on any available arbitrage between said funds. The more complex, the more money Wall Street gets to shave off the top and the less of the market’s profits get returned to the individual investor. And your friend thinks out of all that mess he has figured out the path to guaranteed profits? Is your friend a millionaire? Wait, don’t tell me. I already know the answer.
Anyway, it’s not gonna work (or it might this time, who knows what the market will do) but long term it’s just a way to at best way underperform the market and at worse lose everything. That said, is your friend asking for help? Something I’ve learned in my aged years of wisdom is that it’s not possible to help people who don’t want to be helped. If he’s stuck in this crazy rabbit hole and not asking for help, you beating on his head trying to change his mind won’t help. Your friend will soon or eventually learn the hard way. You can keep asking questions, have conversations about the benefits of buy-and-hold investing, etc, and it might slowly sink in. But he won’t change until he wants to.
If you want a single book that dives into nonsense like this, one of my favorites is:
Maybe you can trick him into reading it by telling him it’s got options day trading secrets that offer 100x guaranteed weekly returns.
