I'm not sure why OP limited the problem to flash crash only. That was before the limit up/down bands were introduced for stocks. But the concern is real. If you only trade with small portion of your account, you might as well trade options. If you are maxing out your BP, you can blow your account. So I don't know how people deal with this except to trade smaller.
Correct me if I'm wrong but I think most of the trades from Flash Crash were collectively cancelled by the exchanges. SEC has since instituted a new rule whereby "exchanges and the Financial Industry Regulatory Authority will break trades that are at least 30% away from the circuit breaker trigger". So I guess you'll lose a leg (and maybe your arm too) but not your entire farm. https://www.sec.gov/news/press/2010/2010-167.htm
since stop market orders placed with the CME are technically "stop orders with protection" that will only execute if the price is within a specific % deviation from the stop price, if the price crashes too quickly outside of that band, i imagine there could be a scenario where CME stop market orders fail to execute and traders are left holding bags if it's not a flash crash -> recovery event. in this case, i imagine the brokers would force-close their position and they'd end up owing money to the brokerage. if you wanna go balls to the wall with some ridiculous amount of leverage to the point you have to seriously worry about random flash crashes, stick with buying options.
I am not familiar with options but have a question. If I buy a call or a put options, during a flash crash, is it possible that my losses would be more than the premium?
Nope! You're totally in the clear. A financial option *gives*you* the option -- the right -- to exercise or not. For the seller, it is an obligation.
IF you stick with trading many years, you will profit and you will lose about same amount in price spikes, but if you worry about the "what if's" of life, you will lose out in life. Never bet the farm and apply 2% risk rule so when crap happens you can recover, but hedging day trading is too large of a bite by end of the year unless cost is almost free but those options are so far away you be wiped out anyway. I believe after 911 happened and exchanges opened again, ES dropped $3,500 on the open? So just cause the brokerage allows $500 per lot margin, you should use much higher amounts if you want to always play the game, better to use $7,000 for day trading.