What Is the Thinkorswim Air Collar Strategy?
If you’re an options trader or investor using Thinkorswim, you might have heard about the air collar strategy, a powerful method to hedge downside risk while maintaining upside potential. While it may sound complex, with Thinkorswim’s advanced features, setting up an air collar is easier than you think.
In this friendly, detailed tutorial, we’ll walk through how to build, monitor, and manage an air collar using Thinkorswim. Whether you’re trading high-volatility stocks or seeking consistent protection, this strategy can help reduce stress and improve results.
2: What Is an Air Collar Strategy?
An air collar is a variation of the traditional options collar strategy. It combines:
- Owning the underlying stock
- Selling a covered call (to generate premium income)
- Buying a protective put (for downside protection)
The twist in an air collar is that the premium earned from the call offsets the cost of the put, often resulting in a near-zero net debit, hence the term “air.” This “free protection” can be highly attractive in uncertain markets.
2: Why Use Thinkorswim for Air Collar Strategies?
Thinkorswim by TD Ameritrade is widely praised for its:
- Advanced options trading tools
- Customizable risk profile analysis
- On-demand strategy builders
- Deep paper trading features
You can visualize trade outcomes, simulate different market moves, and execute multi-leg strategies all in one place.
2: Step-by-Step: How to Set Up an Air Collar in Thinkorswim
Here’s a simple, actionable walkthrough to help you build an air collar strategy inside the Thinkorswim platform.
3: Step 1 – Choose Your Underlying Stock
Start by identifying a stock you currently hold (or plan to buy) that:
- Has high implied volatility
- Is relatively liquid
- Has available options chains with tight spreads
Example: Let’s say you own 100 shares of $XYZ trading at $50.
3: Step 2 – Open the Option Chain
- Go to the “Trade” tab in Thinkorswim.
- Search for your stock ($XYZ).
- Open the Options Chain to view available calls and puts.
3: Step 3 – Select a Call to Sell
Choose a strike price above the current stock price (out-of-the-money) with:
- 30, 45 days to expiration
- Reasonable premium income
- Tight bid/ask spread
Example: Sell 1 call at the $55 strike for $1.50.
3: Step 4 – Select a Put to Buy
Choose a strike price below the stock price (out-of-the-money) to protect your downside.
Example: Buy 1 put at the $45 strike for $1.40.
This trade structure gives you:
- $1.50 from the call
- $1.40 cost for the put
- Net credit of $0.10 (your “air”)
3: Step 5 – Analyze the Risk Profile
Click the “Analyze” tab > Risk Profile. This shows:
- Breakeven point
- Max gain (if stock is above call strike)
- Max loss (limited to the put strike)
You can adjust strikes and expiration to tailor risk/reward.
3: Step 6 , Confirm and Send
- Review the multi-leg trade in the Order Entry panel
- Ensure it’s a “Custom” order with 1 buy put, 1 sell call
- Submit as a limit order
You’ve now successfully placed an air collar on Thinkorswim!
2: Tips for Managing Your Air Collar
- Watch volatility: If IV spikes, your put increases in value
- Roll your call if the stock rises too close to the strike
- Close the position early if you’ve locked in profits
- Use paper trading for practice before going live
When to Use an Air Collar Strategy
Ideal for:
- Earnings seasons (to hedge surprises)
- Volatile markets
- Holding long-term stock positions with short-term risk
- Investors looking for low-cost downside protection
FAQs for SEO (Schema Markup Ready)
1. What is the air collar strategy in Thinkorswim?
It’s an options strategy combining a long stock position, a short call, and a long put , structured so that the income from the call covers the cost of the put, resulting in low-cost downside protection.
2. Can I paper trade an air collar strategy in Thinkorswim?
Yes! Thinkorswim’s paperMoney feature allows you to test multi-leg strategies like air collars with no financial risk.
3. Is the air collar strategy good for beginners?
It can be. While it involves multiple components, Thinkorswim simplifies execution with its custom order builder and visual risk analysis tools.
