A capped index option trades like a spread and will automatically be exercised if the underlying index closes above the capped price. Capped index options have a 30-point cap and look as follows:

Buy 1 OEX June 550 call

Sell 1 OEX June 580 call

If the OEX index closed above 580 at any point during the life of the option both options will be exercised and credited the in the money amount. In the above example, 580 would be known as the capped price. An investor can also traded capped put options in a similar manner. A capped put option would look as follows:

Buy 1 OEX May 600 Put

Sell 1 OEX May 570 Put

In this case the capped option would automatically be exercised if the OEX closed below 570 at any point during the life of the option. With a capped put option the lower strike price is known as the capped price.

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