Well, that was fun.

Nothing like an oh-my-gosh-the-world-is-ending crash to greet you on a Monday morning. I mean, it was fairly obvious the circuitous route to nowhere that stocks were traveling this year was bound to end sometime.

All trading ranges are born to die.

But boy oh boy was the resolution exciting. The speed of the descent and nature of the insane overnight move delivered a healthy dose of nostalgia to those who traded back in 2008.

If this was your first encounter with a crash – and I do think it’s fair to call it a crash – it may have been a bit unsettling. So allow me to provide a few pointers for how to conduct yourself on such a day. Tuck these away for next time insanity strikes.

First, and perhaps most important to option traders, is the fact that liquidity disappears during times of extreme turmoil. Bid-ask spreads were wide enough to drive a truck through Monday morning. On everything. It made options virtually untradeable.

So what to do? Well, chill out for starters. Sit on your hands for a while until some semblance of order returns and bid-ask spreads narrow. And if you must enter or exit a position pick your spots and use a limit order. I suspect traders who really got hosed were those with sell market orders that triggered on Monday morning. That goes for stock traders with sell stops as well as option players with contingent orders to exit their positions at market if the underlying stock dropped below a certain price. For example, buying back your bull put spread if the stock drops to the short strike.

Don’t get me wrong – these types of sell orders have their place, but having a market order trigger when markets are wide and prices erratic will inevitably lead to tears.

If I had exit orders I knew were going to trigger Monday morning due to the down gap I would have cancelled them before the market opened.

I mean sure if the market plunges after the open you’re delivered additional losses, but seriously by the time the market opened the damage was already done. And with the fear and panic as stratospheric as it already was Monday’s trading session had one of two outcomes in store. Either the world was going to end or we were going to rebound.

And I highly recommend betting against Armageddon, particularly when the CBOE Volatility Index (VIX) is already at a barn burning 53. Aside from 2008 show me when it made sense to abandon ship after the VIX ascends into the fifties.

The better course of action had you wanted to exit whatever bullish trades were ailing you would have been to wait for the markets to settle down and then to bail gracefully once bid-ask spreads returned to a more sane level. The epic rally Monday morning or even the gap up Tuesday provided you with much better prices.

And no, I’m not falling prey to hindsight bias. I would recommend such a course of action every time a crash comes calling.

As for the other gems of insight, well, they shall remain in an undisclosed location until next time.

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