Tuesday’s plunge was a stark reminder that markets move up and down. It was a warning shot, a gut check for bulls of all stripes to see how efficient their risk protocols are. If your portfolio suffered, if your losses were surprisingly large, then it’s time for some good old fashion hindsight analysis.

To help your ruminatin’, might I offer up a few questions worthy of consideration?

One: Why did I lose so much? Was it because I held too many bullish positions? Or, because I held on too long? Did I honor stops?

Two: What do I need to do differently next time? Potential answers include: Don’t carry so many bullish positions. Resist the urge to extend your bullish bias into too many stocks (or too many contracts) when markets are complacent. Or, when markets sour, hedge quicker. Sally forth with short calls and call spreads to defend your embattled positions.

Since Tuesday’s drubbing, I’ve been inundated with questions on how to react. Is this the beginning of the big one, the long-awaited, and much anticipated cyclical bear market that will bring any and all buyers to their knees? I’m always honored by such queries, humbled by their implications.

The thought that I, a lowly technician, would possess such foresight as to discern between a garden variety pullback and an oh-my-gosh bear market a mere one-day into the downturn, is flattering.

Sadly, I lack such Miss Cleo-esque qualities.

But, I understand where the question is coming from. It belies the need to know just how bad things are going to get. Traders want to know just how serious to take a day like Tuesday. Should we jettison any and all bullish biased positions from our beloved portfolio? Should we throw our lot in with those dastardly bears and load the boat with negative delta?

The short answer is: just follow your plan, man. No need to be tossed to and fro by every wind of change. Now, if you’re a curious chap, and simply want to know how I’m reacting to the bloodbath then read on, dear friend.

On Tuesday I flipped the defense switch. Like Sylvester Stallone flipping his hat around when he’s about to go ape on his competitor in Over the Top.

Rather than guessing how low this downturn will go, I simply treat the market as “guilty until proven innocent.” As such, I pared back exposure on Tuesday. Some my profitable naked put trades fell all the way back to my entry price. I exited to avoid them turning to a losing position and because I wanted to reduce my portfolio exposure.

I still hold naked puts in a variety of other stocks that will thrive if the market recovers. If it doesn’t then I’ll follow my plan to roll out at expiration if they sit in-the-money or allow assignment and begin selling covered calls until they eventually rebound.

If this is the beginning of some longer-term downtrend, then I guess I’ll be selling covered calls for awhile on these positions, now won’t I?

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