A capped option is an option with an established profit cap or cap price. The cap price is equal to the option's strike price plus a cap interval for a call option or the strike price minus a cap interval for a put option. A capped option is automatically exercised when the underlying security closes at or above (for a call) or at or below (for a put) the Option's cap price.
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An option contract that establishes a maximum profit for the holder. Capped options contain a provision stating that the option is automatically exercised if the underlying security closes on a trading day above (for a call) or below (for a put) some established price. This means that if the underlying security moves in a direction disadvantageous for the writer, there is a maximum amount the writer can lose. A capped option is also called a capped-style option.
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An option with an established price (the cap price) at which the option will be automatically exercised. The cap price is equal to the strike price plus a predetermined interval for a call option and the strike price less a predetermined interval for a put option.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.