This week’s Journal rant will consider how the US Government wields our Federal Income Tax system – how it is a significant source of market volatility, how it is the biggest contributor to a national political divide, and how it does not make sense to have it anymore. Is it time for a National VAT?

Common Sense is Not So Common.

Commentary

Geopolitical events will always be a significant influencer over my Vertical Bull Put Credit Spreads. Regardless of whether the events are real or fake, hyper-political news can send the markets into a tizzy at any time. So I need to keep aware of what is happening in Washington as well as my Trading Account.

One of the most common causes of geopolitical market angst is when Washington starts talking about “tweaking” the Federal Income Tax. We hear cliches like “fair share” and “redistribution” as certain groups try to bully others into capitulating their priorities. And this week’s winner of the GTS is the anticipated multi-part Infrastructure Bill currently being considered by the White House.

To pay for this $4T (+/-) project, this administration is proposing HUGE tweaks to our Federal Income Tax system. Such changes can rattle the markets, exacerbate class warfare, further divide a grossly divided country, AND WORSE OF ALL, send my open positions in the wrong direction.

Talking to the sheeple of the country, the administration keeps harping that only the “rich corporations” will be hit with higher taxes – but I don’t believe it. The tax hikes will trickle down and will reduce the economic activity that will eventually affect me. Government-directed redistribution of taxpayer’s money no longer makes sense.

(Note, I support a significant national infrastructure project. There can be a lot more good than bad that can come from such investments.)

Is the Fed Income Tax System Passé?

The Federal Government does not create wealth – it consumes it. And the primary source of the government’s consumable wealth is us – the taxpayers. So in 1861, when there was not much of a national economy to pull from, it made sense for the US Government to create the National Income Tax System.

But since 1861, the Federal Government did create something remarkable – a massively successful economic system. Built on the principles of Free Enterprise and 350 million willing participants, the US has the most incredible economic engine in the history of the world. This engine is self-sustaining, expanding, and accessible to everyone. In 2019, the US economy was worth nearly $21.5 Trillion (not including the Shadow Economy).

It seems that a robust US economy is a more appropriate source of taxation than targeting the ever-dwindling pool of individuals that helps make the economy rich in the first place.

The Shadow Economy

The biggest unintended byproduct of our Income Tax System is the “Shadow Economy.” This is where Trillions of dollars exchange hands and is kept secret from the IRS. These are the drug dealers, tax cheaters, undocumented workers, illegal gamblers, money launderers, and thieves. They are also the honest laborer who barter their services for services or cash under the table so to not pay Income Tax. These are legitimate benefits of the US Economic System for a massive segment of people who are TRULY not paying their “fair share” into the tax system.

US Economy as the Mighty Mississippi

If I can make an analogy, I would compare the Mighty Mississippi River to the US Economy. Both are amongst the largest in the world, and both are fed by massive and minor tributaries. And both are the source of wealth and prosperity for all the connected downstream communities.

The Mississippi is fed by the inflow from such massive rivers as the Missouri, Ohio, Arkansas, and Illinois rivers. It is also fed by thousand of smaller rivers along the way. Similarly, the US Economy is fed by Corporations, wealthy individuals, and a bunch of people like me – just by buying and selling goods every day.

We know enough about how the Mississippi works to understand if we start pinching the inflows from major tributaries, the sheer production capability of the entire river will diminish. Thousands of smaller downriver outflows can dry up and destroy crops and rangelands. But we don’t seem to realize that when we siphon working capital from active corporations and mega spenders, the productivity of millions down the economic stream can also dry up.

The Federal Tax system as implemented today no longer makes sense. The major tributaries to the national treasury are getting smaller (or fewer). Increasingly, the narrowly targeted Income Tax system has to milk more from an ever-dwindling pool to meet the Government’s priorities. This cycle will eventually pinch those major economic contributors, thereby escalating debt, and could throw the US into austerity measures that Greece will be proud of.

Replace the Federal Income Tax System with a National Value Added Tax (VAT)

Managing the Federal Income Tax today is a high-effort balancing act to keep a robust economy flowing while skimming as much as possible from a shrinking pool of available taxpayers. This balancing act pits different economic philosophies against each other, which is the biggest component of our political divide. It requires marshaling millions of income earners to comply with complicated rules and complex tax returns.

If we did not have an Income Tax system, social priorities might align easier.

I suggest that we totally ditch the Federal Personal Income Tax system (taxing income of any kind) and replace it with a three-tier National Value Added Tax. This suggestion also includes tossing the income-based Corporate Taxing system as well. 

Three-Tier VAT

Individuals and corporations should no longer pay taxes based solely on progressive income. Instead, we should be taxed based on progressive consumption. High-end products might cost more to buy but would be offset by not having tax withholdings (or estimated quarterly payments) subtracted from our income.

Not everyone will pay a VAT, and some groups of consumers will pay a accelerated rate. Therefore, I propose that the VAT have these three tiers:

Tier-1: 0% VAT for essential goods and services categorized as necessities. This category can include unprepared foods, basic clothes, essential services (electric, water, and communications), and basic housing – to name a few.

Tier-2: 7% – 14% VAT for most all other goods and services. (Note, this alone will replace the current Income Tax returns)

Tier-3: 15% – 20% VAT for any single item that collectively costs over one million dollars (with possible exceptions). (Note, this will replace the notion of a “Wealth Tax.”)

There are over 160 countries that use value-added taxation. It raises government revenues without punishing success or wealth, as income taxes do. It is simpler and more standardized than a traditional sales tax and has fewer compliance issues. There really isn’t much of a downside.

Is VAT Common Sense?

Replacing taxes on all income with a National VAT should provide these benefits:

• The wealthy and other “big spenders” will pay the largest percentage of all taxes. The more they spend, the more they pay.
• Low or no income people will pay close to no taxes. But when they buy outside of their economic sphere (such as buying a car, HDTV, or a high-end phone), they will pay the same tax as everyone else.
• The Shadow Economy disappears. Regardless of how I get my money, I’ll pay taxes when I spend it.
• Politicians can manage the VAT as a singularity that affects the economy, no more social engineering via tax mandates.
• No more drudgery of preparing annual Federal Taxes.
• Payroll tax (Social Security) will continue to be collected separately and recorded by the employer.

Let’s make Common Sense common again!

Other Posts from OptionsTradesByDamocles

This Week’s Market Sentiment

(As of 03/29/2021)

In this section, I review five indicators: VIX, S&P 500 Put/Call Ratio, S&P Market movement, Consumer Sentiment Index, and Geopolitical events that could affect the market’s direction. I will use these indicators to help guide my trading decisions for this week.

This Market Sentiment Section is typically completed by midday Monday morning. By the time this journal is published, it will be a week old.

VIX: Broad Market Volatility

The VIX is an emotion-gauge for the general investing population. It is thought to be driven by the Marketeers’ current level of greed or fear. As a one-month forward-looking volatility matrix, it is not designed to tell us which direction the market will be going, but more of how fast it can get there.

A VIX of 15% is assumed to be a market at rest. But since the intrinsic nature of the Stock Market is to move up, a VIX closer to 15% or below will have an innate tendency to rise.

The 1-month Regression Channel for the VIX continues to shows a steady decline, suggesting that the Marketeers are settling in for the current economic environment. Note: a low VIX does not mean that the market will rise (although it usually does). What it does mean is whatever direction the market is moving now, will more like continue.

The VIX ended last week at 17.3%, which is a psychological win by dropping below 20%..

The current VIX (17.3%) is below the 9-Day SMA and the 9-Day SMA is below the 50-Day.

The VIX continues to hover above 15, which in itself is waving the jitters flag (although weakly). But the steep drop over last week to below 17% is a good sign that we are moving in the right direction. I will initially set this week’s DEFCON (Options Trading Readiness Signal) level to 4. Let’s see if the other indicators will change this level.

DEFCON = 4

Put/Call Ratio:

Put Options are frequently used as protections against existing investments falling. When the ratio between Put Options bought versus Call Options bought is above 1, then this is an indicator that the Marketeers are buying insurance to what they may see as declining Markets. Conversely, when the Put/Call Ratio falls below 1, then there is a general sense that the broader Markets will increase, and more investors are buying more than selling.

The presived issues that drove the S&P 500’s Put/Call Ratio above .5 seemed to be just that – presived.

At 0.43, there is nothing this Put/Call Ratio is saying other than most Marketeers are going long. This is a good sign of confidence.

I’m going to leave DEFCON to 4.

Maintain DEFCON = 4

Consumer Sentiment Index (CSI):

This Consumer Sentiment Index (CSI), as provided by the University of Michigan. This indicator tracks US consumer sentiment based on surveys on random samples of US households.

A low rating is a general dissatisfaction with our current management of U.S. economic policies. This dissatisfaction will imply that something has to change. A high satisfaction rating suggests approval of the current policy management and implies market stability.

As of Mar ’21 CSI’s level has continued to rise from the month before. It is now at 84.9 from 83.0 two weeks earlier. (ycharts.com). The continued improvement in Consumer Sentiment is a good sign that the economy is ramping up.

This index lever reinforces that current DEFCON level.

Maintain DEFCON = 4

Market Indexes:

DOW (DJX) = 33,153 – Up 0.2% from 33,073 last week. (4 week deviation: 463 down from 689 last week)
S&P 500 (SPX) = 4,020 – Up 1.1% from 3,975 last week. (4 week deviation: 47.9 up from 45.6 week)

The S&P 500 is a stock market index that tracks the 500 largest companies in the U.S. This index represents about 80% of all the capitalization for the country. The S&P is widely considered the best indicator of how all the U.S. markets are performing.

Market Thrashing

4-Week Thrashing of DJX = +/- 463 points or 1.4% of the market’s volume is down from 2.1% last week.

4-Week Thrashing of SPX = +/- 57.0 points or 1.2% of the market’s volume is slightly down from 1.4% last week.

Thrashing in the 1.x% is going to indicate a steady-hand market. The lower the thrashing for the broader market, the lower the VIX will move.

The S&P 500 closed above 4,000 last Friday. A huge indicator that the country’s largest corporation are winning the COVID-Recovery race.

If it wasn’t for the VIX being above 15%, I could call the markets DEFCON level to 5.

Maintain DEFCON = 4

Geopolitical Tree-Shakers (GTS):

One way to look at the GTSs is like a lit fuse to a bomb. The fuse can be fast or slow, and the bomb can easily be a dud. But I need to watch this closely as an indicator. The GTS can significantly disrupt all the other indicators at the drop of a hat.

• Becoming hyper-aware of the inevitable rising of interest/inflation rates
• A Federal Infrastructure/Tax bill is being negotiated – expect lots of pork
• Record vaccinations are easing COVID concerns
• Georgia Voter Law reform is becoming a progressive rally cry.
• Immigration crisis

Rising interest/inflation rates will be a GTS for some time. As long as we continue to rebuild the jobs lost in 2020, demand for more stuff will increase, and supply will lag. I expect interest rates to start a year-long creep up until we get into the pre-Trump economy.

The Infrastructure Bill as crafted by the White House, has not yet hit Congress. The early review suggests this bill is less about “traditional infrastructure” improvements and more about making our infrastructure more green (a giant win for the Climate Change group).

The migration log-jam at the southern borders is being ignored by the liberal media and begrudgingly back-burner by Congressional Democrats.

Maintain DEFCON = 4

My sentiment for this coming week:

The indicators (VIX, CSI, P/C Ratio, and Market Trends) show a happy group of Marketeers for this coming week. But geopolitical events will always be a significant influencer for my Vertical Bull Put Credit Spreads. Regardless of whether the events are real or fake, hyper-political news can send the markets into a tizzy at any time.

The GTS for this week definitely has some low-level rumbleings. Rising interest rates (good news for a rebuilding economy but bad news for Stock Markets) will be a long-term concern.

VIX and GTS are strong motivators to maintain DEFCON 4 with a eye on DEFCON 3.

Trading Readiness Level

DEFCON = 4

This week, I will focus on:

Because the markets seem to be on a long-term growth pattern after the initial Interest Rates dump, I’ve started to violate the $2,000 max-risk per week rule. But I’m still maintaining no more than two new positions per week.

• Two spreads (both totaling < $2.5K risk) as the Markets see fit.
• Spread term of 8-weeks or less.
• Probability of OTM > 80%

Profit and Loss Statement

(As of 04/09/2021)

Balance Sheet

	Year 2021	Month Apr	Week #14
Beginning Account Balance	$16,000.00	$17,057.20	$17,057.20
Deposits (Div. & Int.)	$0.37	$0.00	$0.00
Withdraws (paycheck)	-$900.00	-$0.00	-$0.00
Premiums on Open	$2,316.01	$199.00	$199.00
Premiums on Close	-$206.00	-$74.00	-$74.00
Fees Paid (total)	-$34.50	-$6.32	-$6.32
Ending Account Balance	$ 17,175.88	$ 17,175.88	$ 17,175.88
Total Gain/Loss	$1,175.88	$118.68	$118.68
ROR		0.7%	0.7%
ROC	7.3%

Progress Graph

(Note: the negative weekly results for weeks 4, 8 and 12 are when I withdrew $300 from the Trading Account for my paycheck.)

My Performance vs. SPY

Hypothetically, instead of depositing $16,000 in my Options Trading Account, could I have done better if I bought $16,000 of the ETF/SPY instead?

	Options Trading	SPY (Fictional)
Initial Investment (As of Jan 4, 2021)	$16,000 (Cash)	$16,000 (43.4 shares @ $368.55)
Funds Added	$2,316.38 (Premiums)	0.17 shares (Dividends Reinvested)
Funds Removed	-$240.50 (Early Close & Fees)	$0 (Fractional Shares Sold)
Ending Balance	$18,075.88 (Cash)	$17,821.44 (43.6 shares * $409.21 CV)
ROI	+13.0%	+11.4%

Schedule for this Week

Goals for this week: (04/05/2021 – 04/09/2021) (Week #14)

• Document lessons learned or new thoughts
• Open one or two wide-strike spread
• Update Trading Log as trades occurs

Monday:

• Determine/update this week’s market sentiment section
• Calculate/record Put/Call Ratios for all stocks on the watch list
• Review/tweak Trend-Channels for all stocks in the watch list
• Set target expiration dates for all options as follows:
  • Bull Credit Spreads: May 28 (6-8 weeks)
    Note: If there are no Options Chains published for the 8-week expiration, then use the next Options Chain down from 8-weeks (7-weeks, 6-weeks). Beyond 4-week expirations, only the monthly chains are available to trade.
• Look up Ex-Dividend dates for positions in/approaching ITM (MarketWatch/Calendar)
• Stage possible trades for all watch list stocks by 10:00 AM
• NO TRADING BEFORE 10 AM. (Let the Market find its direction after the weekend.)
• Watch one Webcast or take one online mini-course to be completed by Friday.

Tuesday – Thursday:

• Review how yesterday’s staged trades moved. Adjust premiums to take advantage of movements.
• Submit a couple of Spreads, but keep a close watch. If one is accepted, cancel the others (we want only one new active trade per day).
• Be mindful of Entry Rules.

Friday:

• Review the total technical dollars at risk for this week. If significantly below $500, then submit additional spreads if prudent.
• Update and post weekly journal (this blog) with any lessons learned or strategy changes.

This Week’s Trade Activity

(As of 04/09/2021)

Spread Count Summary:

	Year 2021	Month Apr	Week #14
Vertical Bull Put Credit Spread	22	2	2
Vertical Bear Call Credit Spread	0	0	0
Vertical Bull Put Debit Spread	0	0	0
Vertical Bull Call Debit Spread	0	0	0
Margin Interest	1	0	0
Total	23	2	2

Current Dollars at Risk:

	Year 2021	Month Apr	Week #14
Vertical Bull Put Credit Spread	$6,901.	$2,801.	$ 2,801.
Vertical Bear Call Credit Spread	$0.	$0.	$0.
Vertical Bull Put Debit Spread	$0.	$0.	$0.
Vertical Bull Call Debit Spread	$0.	$0.	$0.
Iron Condor	$0.	$0.	$0.
Total Dollar Risk	$6,901.	$2,801.	$2,801.
Max Risk Allowed	$16,000.00	$8,000	$2,500.

I opened a 20 strike wide spread on 4/8. See the notes for this New Trades position as to the reasons.

New Trades Opened This Week

(03/29/2021 – 04/01/2021)

QQQ: 300p/280p  – Open 04/08/21 – Expires 05/21/21 – Max Gain = $119.00- Open Price = $333.83
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=85.4%, Head Room=-10.1%, Max Loss=$1,879.00, ROC 6.3%, 43d Dev = $7.80

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $16,000? Yes ($8,302)
• Max dollar at risk this week < $2,500? No ($2,801)
• Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (43 days)
• Long-term trend (four months) bullish? Yes (see chart)
• Short-term trajectory of the underlying bullish? Yes (see chart)
• Put/Call Ratio < 1, (or falling if it is > 1)? No (1.4 up from 1.0)
• Current price above 9-Day SMA?: Yes (see chart)
• 9-Day SMA above 50-Day SMA?: Yes (see chart)
• Short-strike < 1 SD below the current price? Yes (1SD=306.61)
• Short-strikes Prob-OTM > 80%? Yes (85.4%)
• Short-Strike price below the trend channel at expiration?: Yes (see chart)
• Current price within the bottom 1/2 of Trend Channel?: No (see chart)
• Long-strike at maximum width (<= 15)? No (20 strike width)
• Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

1. Two positions have closed weeks early during the last 10-day runup. I suspect that there will be a third before this week is over. Therefore I now have $3,000 of Trade Account risk remove.
2. QQQ is experiencing a near V-Shape recovery from the correction a month ago. It looks like it is returning to the pre-correction trend.
3. Because the current price of QQQ has breached the Resistant Line on the Trend Channel, I dropped the calculated Short Strike from 305 to 300. I did this assuming there will be some kind of pullback due to this week’s epic runup.
4. The 1-month trend is aggressively bullish.

Because of these four events, I elected to open a 20 strike wide position to get a maximum premium.

IWM: 200p/190p  – Open 04/06/21 – Expires 05/21/21 – Max Gain = $80.00- Open Price = $225.02
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=83.8%, Head Room=-11.1%, Max Loss=$919.00, ROC 8.6%, 45d Dev = $5.80

Entry Rules for Vertical Bull Put Credit Spreads:

• Current maximum dollars at risk < $16,000? Yes ($8,245)
• Max dollar at risk this week < $2,500? Yes ($920)
• Max time to have any dollars at risk < 8 weeks (<56 days)? Yes (45 days)
• Long-term trend (four months) bullish? Yes (see chart)
• Short-term trajectory of the underlying bullish? Yes (see chart)
• Put/Call Ratio < 1, (or falling if it is > 1)? No (3.1 up from 1.3)
• Current price above 9-Day SMA?: Yes (see chart)
• 9-Day SMA above 50-Day SMA?: No (see chart)
• Short-strike < 1 SD below the current price? Yes (1SD=204.87)
• Short-strikes Prob-OTM > 80%? Yes (83.8%)
• Short-Strike price below the trend channel at expiration?: Yes (see chart)
• Current price within the bottom 1/2 of Trend Channel?: Yes (see chart)
• Long-strike at maximum width (<= 15)? Yes (10 strike width)
• Set a GTC Conditional Trailing Stop Limit (CTSL): (Not Set)

Trades Currently Cooking

(As of 04/09/2021)

QQQ: 285p/270p  – Open 03/31/21 – Expires 05/21/21 – Max Gain = $91.00- Open Price = $318.83
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.9%, Head Room=-10.6%, Max Loss=$1,368.00, ROC 9.5%, 51d Dev = $9.4

DIA: 305p/390p  – Open 03/30/21 – Expires 05/21/21 – Max Gain = $131.00- Open Price = $318.83
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.0%, Head Room=-7.7%, Max Loss=$908.00, ROC 9.9%, 52d Dev = $6.9

SPY: 365p/355p  – Open 03/23/21 – Expires 04/30/21 – Max Gain = $75.00- Open Price = $392.34
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=82.4%, Head Room=-6.9%, Max Loss=$924.00, ROC 8.0%, 38d Dev = $5.15

IWM: 205p/195p  – Open 03/11/21 – Expires 04/23/21 – Max Gain = $103.00 – Open Price = $230.45
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=80.5%, Head Room=-11.4%, Max Loss=$896.00, ROC 11.4%, 43d Dev = 6.5
Now: Prob. OTM=88.0%, Head Room=-9.4%, IV%=6%

Trades Closed This Week

(As of 04/09/2021)

DIA: 305p/390p  – Open 03/24/21 – Expires 04/30/21 – Max Gain = $99.00- Open Price = $326.73
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Head Room=-6.3%, Max Loss=$1,400.00, ROC 7.0%, 37d Dev = $6.5
At Close: Prob. OTM=95.3%, Head Room=-9.2%, IV%=1%, ROR= 5.1%

Cost to open: $0.91 premium collected * 100 shares = $91.00
Cost to close: $0.19 premium paid * 100 shares = $19.00
Net Profit= $91.00 to open – $19.00 to close = $72.00 – fees
Actual ROR = $72.00 / 1,400.00 = 5.1%

This position closed 21 days early via a 80% of max gain trade trigger of .20.

QQQ: 290p/270p  – Open 03/16/21 – Expires 04/30/21 – Max Gain = $177.00- Open Price = $323.99
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.3%, Head Room=-10.5%, Max Loss=$1,822, ROC 9.7%, 45d Dev = $9.91
At Close: Prob. OTM=94.4%, Head Room=-12.6%, IV%=2%, ROR= 7.7%

Cost to open: $1.76 premium collected * 100 shares = $176.00
Cost to close: $0.35 premium paid * 100 shares = $35.00
Net Profit= $176.00 to open – $35.00 to close = $141.00 – fees
Actual ROR = $141.00 / 1,822.00 = 7.7%

This position was closed 23 days early via an 80% of Max-Gain trade trigger.

Being a 20 strike-width position, the risk carried was $2,000 from my Trading Account. Closing early moved that $2,000 from the risk column to the do-it-again column.

This position had a ROR of only 7.7%. My return on what I was risking was a lot less than my other positions. This low ROR is a by-product of the wider spreads.

IWM: 195p/185p  – Open 03/02/21 – Expires 04/16/21 – Max Gain = $102.00 – Open Price = $223.41
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.2%, Head Room=-12.7%, Max Loss=$897.00, ROC 11.3%, 45d Dev = 6.6
At Close: Prob. OTM=97.1%, Head Room=-13.3%, IV%=4%, ROR= 10.3%

Cost to open: $1.02 premium collected * 100 shares = $102.00
Cost to close: $0.10 premium paid * 100 shares = $10.00
Net Profit= $102.00 to open – $10.00 to close = $92.00 – fees
Actual ROR = $92.00 / 897.00= 10.3%

Closed 11 days early.

IWM: 195p/185p  – Open 02/24/21 – Expires 04/16/21 – Max Gain = $99.00 – Open Price = $224.68
(Vertical Bull Put Credit Spread)
At Open: Prob. OTM=81.6%, Head Room=-13.2%, Max Loss=$900.00, ROC 10.9%, 51d Dev = 8.7
At Close: Prob. OTM=97.1%, Head Room=-13.3%, IV%=4%, ROR= 9.9%

Cost to open: $0.99 premium collected * 100 shares = $99.00
Cost to close: $0.10 premium paid * 100 shares = $10.00
Net Profit= $99.00 to open – $10.00 to close = $89.00 – fees
Actual ROR = $89.00 / 900.00= 9.9%

Closed 11 days early.

Conclusion

Disclaimer

Even though I have tried to make it clear that this blog is my journal, documenting my trek into Options Trading, it has been suggested by others that I, nevertheless, include a general disclaimer. So here goes…

“This blog and the information contained herein is not intended to be a source of advice or analysis concerning the material presented. The information and/or documents contained in the blog do not constitute investment advice.”

Contact Me

To contact me or ask me a non-post related question, please use this form. If you want to comment on this post’s topic, please use the “Leave a Reply” box below so it can be attached to the post for future reference. – Thanks