Goodbye VIX 25, 35, and even 45. We might not see those levels for a long time. We could be looking at a VIX trading range bound from 53-80 for at least a couple of months, or until the economy starts to recover again. Take a look at the graph below to see how the recent range in the VIX has developed.

So how do you trade the market with the VIX as your guide? First, think about products to trade. What products have a correlation with the VIX? Any index ETF will suffice. I like to trade the DIA, but the SPY or IWM should follow a similar pattern. Second, use the VIX levels to determine whether to buy or sell premium. When the VIX gets back to the 80 levels, I add vertical spreads, not horizontal or time spreads. The premium is just too pricey to purchase. Take advantage of those juicy prices and sell verticals or iron condors that are in the 60%-75% probability of success range.

Once the VIX gets back down to the 53-55 range, as it did following its end-of-November rally, think about placing more horizontal spreads in your portfolio. I prefer to use diagonals in this environment, as they are relatively cheap right now compared to corresponding calendars. Diagonals can be used as directional plays as well. If you believe that the market is going to sell off, then buy a put diagonal. This strategy will create negative Delta and positive Theta while generating positive Vega. The positive Vega and negative Delta will perform well for your portfolio in a market downturn.

Use the VIX to determine whether or not to employ vertical or horizontal strategies. This type of trading involves constant adjustments to your option portfolio, but in this environment, it could mean the difference between profitability and loss. Happy trading.

thinkorswim, Inc. and its registered employee, Joe Kinahan, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.