Watching your portfolio fall 20% is rough. It feels personal, and the urge is to do something right away. But a drawdown is also just a problem to work through, and the first job isn’t to win the money back quickly. It’s to stop making it worse, protect what’s left, and rebuild with a plan.

Here’s the process I’d follow, and where options can help along the way.

Step 1: Figure out what’s actually broken

Go through every position and put it in one of three buckets:

  • Keep: the reason you bought it still holds, and the position isn’t too big.
  • Trim: the idea is fine, but you own too much of it.
  • Sell: the reason you bought it is gone, the company’s debt or cash flow has gotten worse, or the chart is badly damaged.

Do this before you place a single options trade. Hedging a position you should have sold is just paying to keep a mistake.

Step 2: Put the guardrails back up

A 20% drop usually means the old limits weren’t tight enough. Set new ones and write them down:

  • a cap on how much any one position can lose you,
  • more cash on hand, so you have room to act,
  • a maximum drawdown for the whole portfolio, and what you’ll do if you hit it,
  • hedges on the positions you most want to keep.

Step 3: Pick option strategies that fit what you’re trying to do

The option strategies guide maps each strategy to a market outlook. After a drawdown, four of them come up most often.

Protective puts: insurance on your core holdings

If you still believe in a position long term but can’t stomach another leg down, buy a put under it. You pay a premium, and in return your losses below the strike are covered. More in the protective put guide.

Covered calls: income while you wait

If you expect your stocks to go sideways for a while as things settle, selling calls against them brings in premium and lowers your cost basis. The trade-off is that you cap your upside if they rally. See covered calls.

Collars: cheaper insurance when volatility is high

After a selloff, puts get expensive. A collar pairs the put you buy with a call you sell, and the call premium pays for some or all of the put. You give up upside above the call strike in exchange for cheap protection.

Spreads: a defined-risk view on what’s next

If you think a measured rebound is coming, a bull call spread lets you play it with a known maximum loss. If you think there’s another leg down, a bear put spread does the same in the other direction.

Step 4: Avoid the three classic mistakes

  1. Revenge trading, trying to make it all back in a few big trades.
  2. Going too big too soon right after you’ve finally cut risk.
  3. Using strategies with unlimited risk, like naked calls, while you’re still emotional about the losses.

A written checklist you go through before each trade helps more than you’d think.

Step 5: Give yourself 90 days

  • Days 1–15: cut risk, add hedges and trim the weakest positions.
  • Days 16–45: only take your highest-conviction setups, and keep them small.
  • Days 46–90: add size only once the trend, market breadth and earnings start improving.

The bottom line

A 20% decline hurts, but it’s manageable if you put risk first and get selective about offense. Used on purpose, options can help: puts for protection, covered calls for income, collars for cheap insurance and spreads for defined-risk bets. Used to chase losses, they’ll make things worse.