Surviving a Market Crash

Read This Before the Crash

You will not think clearly during a crash. No one does. Your portfolio will be deep in the red. Headlines will scream about economic collapse. Your broker will send margin warnings. Other traders will post about blowing up their accounts.

Read this lesson now, when you are calm. Bookmark it. Print it out. The instructions below are your survival plan.

What a Crash Feels Like

Crashes do not announce themselves. They start as normal pullbacks — a 2-3% drop over a few days. You have seen this before. No big deal. Then the drop accelerates. Down 5% in a week. Then 8%. Then the market drops 4% in a single day and VIX spikes from 18 to 35.

Now you are in it. Every position in your portfolio is losing money. Your unrealized losses are growing by the hour. You are checking your account every 10 minutes. You feel sick.

This is normal. Every trader who has survived a crash has felt this way. The ones who came out the other side had a plan and followed it.

Step 1: Stop Opening New Trades (Day 1-3)

The moment you recognize that a correction has turned into something more severe (SPY down 7%+, VIX above 28), stop opening new positions. Full stop. Your first job is to assess what you have, not add more risk.

Do not try to "sell into the spike" immediately. The spike might get much worse. March 2020 went from VIX 25 to VIX 82 in two weeks. Selling at VIX 25 felt like a great trade until VIX was 50 three days later.

Step 2: Triage Your Positions (Day 1-3)

Go through every open position and sort them into three categories:

Green — Healthy. The position is not threatened. The short strike is far from the stock price. These positions are fine. Leave them alone.

Yellow — Stressed. The position is approaching your risk limits. The stock is near your short strike. The position has doubled in cost. These need attention soon but are not emergencies.

Red — Critical. The position has breached your stop-loss level. It is deep in-the-money. The thesis is completely broken. These need to be closed immediately.

Close all Red positions first. Then manage Yellow positions. Leave Green positions alone.

Step 3: Reduce Portfolio Heat to 5% or Below (Day 3-7)

During a crash, your standard 8-12% heat target is too high. Reduce to 5% or less. This means closing positions — even healthy ones — to free up cash and reduce exposure.

Close your weakest positions first — the ones where the stock has dropped the most, or where you have the least conviction in a recovery. Keep your highest-quality positions — the ones where the underlying company is strong and the stock is likely to recover within 3-6 months.

Step 4: Do Not Sell Everything

This is equally important. The worst thing you can do in a crash is close every position at the bottom. Panicked liquidation locks in maximum losses and leaves you with no positions to benefit from the recovery.

If you followed your sizing rules, no single position can destroy you. Close the bad ones. Keep the good ones. Stay disciplined.

Step 5: Start Selling Premium Carefully (Week 2-4)

After the initial panic subsides — you will know because VIX starts closing lower on consecutive days and the market has several up days — begin selling premium in small amounts.

Rules for crash premium selling:

• Use 50% of your normal position sizes
• Sell puts 15-20% below the current market (further OTM than usual)
• Use 45-60 DTE (longer expiration for more time value and buffer)
• Sell only on SPY, QQQ, or the most liquid, highest-quality stocks
• Deploy no more than 10% of your capital per week

The premium available during and after crashes is 2-4x normal levels. You do not need to be aggressive. Even conservative crash trades produce outsized returns.

Step 6: Track Your Recovery (Week 4+)

As the market stabilizes and begins to recover, your remaining positions will improve. The premium you sold during the spike will decay rapidly. This is where patience pays off.

Track your account daily during the recovery. You should see a steady improvement as VIX normalizes and stock prices recover. Do not increase position sizes until your account has recovered to within 5% of its pre-crash level.

What Not to Do

Do not average down. If you have a losing put on AMD at $140 and AMD drops to $110, do not sell another put at $110 to "improve your average." You are doubling your exposure to a stock in freefall.

Do not switch to buying puts for protection after the crash has started. Puts are astronomically expensive during a crash. Buying them at VIX 40 is the equivalent of buying insurance after the fire has already started.

Do not go to cash entirely. Full liquidation at the bottom is the single most expensive mistake in investing. You lock in every penny of loss and miss the snapback rally that typically recovers 30-50% of the decline within weeks.

Do not check your account every 30 minutes. Once you have triaged and closed your Red positions, check once in the morning and once in the afternoon. More frequent checking leads to emotional decisions.

Do not blame yourself. Crashes happen. They are part of the market. If you followed your risk rules, the drawdown is manageable. The crash did not fail you — it tested you. How you respond is what matters.

Historical Recovery Times

The market has recovered from every crash in history. The traders who survived to participate in the recovery came out ahead. The ones who blew up or panic-sold at the bottom did not.

Your Crash Preparation Checklist

Do these things today, before the next crash:

1. Write down your triage plan — which positions get closed first
2. Set alerts on your broker for VIX levels (25, 30, 35)
3. Know your portfolio heat at all times
4. Keep 30-50% of your account in cash
5. Have a written rule: "When VIX exceeds 30, I stop opening new trades and begin triaging"
6. Bookmark this lesson

The crash is coming. You do not know when. You do not know how bad it will be. But you can be ready.