A capped style option is designed to limit the amount of profit that an options trader can earn. Since this style of option limits or puts a cap on the profit, it is known as a capped style option.
The basic idea of a capped style option is to automatically exercise an option contract once the underlying asset like shares or commodities reaches a predetermined price level. This is how capped style options work for calls & puts:
Traders arrive at the cap price for a capped style option by: