Capped Option

AAA

DEFINITION of 'Capped Option'

A security that features a maximum limit on the holder's profit potential. A capped option is automatically exercised if and/or when the underlying asset reaches a certain price. Obviously, a put option would be exercised if the price on the underlying asset falls below the option cap price, while a call option would be exercised if the underlying asset price rises above the option cap price, thereby locking in the maximum profit possible from the option exercise.

INVESTOPEDIA EXPLAINS 'Capped Option'

While capped options protect the writer from losing more than a predetermined, fixed amount and, hence, would seem to be disadvantageous to buyers, they are generally easier to exercise and often don't require the type of movement that one would need to see in a standard option to realize decent profits. Some examples of capped options include options on the S&P 100 and S&P 500 indices that were created by the Chicago Board of Options Exchange (CBOE) in 1991.

RELATED TERMS
  1. Gold Option

    An option to buy or sell gold bullion at a future date at a set ...
  2. Call

    1. The period of time between the opening and closing of some ...
  3. Ceiling

    The maximum level permissible in a financial transaction. Ceiling ...
  4. Floor

    The lowest acceptable limit as restricted by controlling parties. ...
  5. Index Option

    A financial derivative that gives the holder the right, but not ...
  6. Long-Term Equity Anticipation Securities ...

    Publicly traded options contracts with expiration dates that ...
Related Articles
  1. Options Basics Tutorial
    Options & Futures

    Options Basics Tutorial

  2. How To Buy Oil Options
    Options & Futures

    How To Buy Oil Options

  3. The Basics of Options Profitability
    Options & Futures

    The Basics of Options Profitability

  4. Want to Day Trade? Try Binary Options ...
    Options & Futures

    Want to Day Trade? Try Binary Options ...

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center