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Market-wide circuit breakers halt trading when the S&P 500 drops 7% (Level 1), 13% (Level 2), or 20% (Level 3) from the prior close. Level 1 and 2 trigger 15-minute halts before 3:25 PM ET. Level 3 halts trading for the remainder of the day.
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Key takeawayDuring a circuit breaker halt, you cannot adjust short premium positions. Size your naked or short premium positions so that a 13% overnight gap does not exceed your maximum tolerable loss.
💡 Why It Matters
Circuit breakers halt all trading, including options, meaning you cannot adjust or close short premium positions during the halt. Your maximum loss scenario must account for the possibility that the market reopens much lower after a halt.
⚙ How It Works
Level 1 (7% S&P 500 decline) triggers a 15-minute halt if before 3:25 PM. Level 2 (13% decline) triggers another 15-minute halt if before 3:25 PM. Level 3 (20% decline) halts trading for the rest of the day. Circuit breakers reset daily and use the prior day's closing price as the reference.
📋 Example
S&P 500 drops 7.2% by 1:00 PM, triggering a Level 1 halt. Your short SPX 4200 puts (5% OTM at yesterday's close) are now 2.2% OTM and losing $15,000. During the 15-minute halt, you cannot adjust. Trading resumes and the index drops another 3%, putting your puts 0.8% ITM with losses at $35,000.
⚠ Common Mistakes
Traders size positions assuming they can always exit. Circuit breakers prove you cannot. Position sizing should assume you cannot trade for 15-30 minutes during the worst possible moment. If a 13% gap makes your position unrecoverable, you are too large.
❓ FAQ
What is Circuit Breaker?
Market-wide circuit breakers halt trading when the S&P 500 drops 7% (Level 1), 13% (Level 2), or 20% (Level 3) from the prior close. Level 1 and 2 trigger 15-minute halts before 3:25 PM ET. Level 3 halts trading for the remainder of the day.
Why does Circuit Breaker matter for premium sellers?
During a circuit breaker halt, you cannot adjust short premium positions. Size your naked or short premium positions so that a 13% overnight gap does not exceed your maximum tolerable loss.
How does Circuit Breaker work?
Level 1 (7% S&P 500 decline) triggers a 15-minute halt if before 3:25 PM. Level 2 (13% decline) triggers another 15-minute halt if before 3:25 PM. Level 3 (20% decline) halts trading for the rest of the day. Circuit breakers reset daily and use the prior day's closing price as the reference.
What are common mistakes with Circuit Breaker?
Traders size positions assuming they can always exit. Circuit breakers prove you cannot. Position sizing should assume you cannot trade for 15-30 minutes during the worst possible moment. If a 13% gap makes your position unrecoverable, you are too large.
Related Terms
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Options expiring on the current trading day — zero days to expiration.
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When near-term VIX exceeds longer-term VIX (VIX/VIX3M ratio above 1.0).
Block Trade
A block trade is a privately negotiated options transaction of at least 50 contracts (varies by exchange) that is executed off the public order book and then...
Charm Exposure
The aggregate delta decay across all options in a dealer hedging book.
This is not financial advice. Read our full investment disclaimer.