Capping


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Capping

A practice in which the writer of a call option who holds a long position in the underlying asset sells large quantities of the underlying asset. A call option gives the holder the right but not the obligation to buy the underlying asset from the writer at an agreed-upon price regardless of what the spot price is when the option is exercised. If the underlying asset rises in price, this is advantageous to the holder but not to the writer. Therefore, the writer may practice capping to increase supply in the market and to keep the price of the underlying asset from rising. If successful, the holder of the call does not exercise the option and the writer is able to profit from the premium (or price the holder paid to buy the option).