What Is a Capped Option?

A capped option is an option whose upside potential is limited by a predetermined price level. A call option is capped at the strike price of the option, while a put option is capped at the strike price minus the premium paid for the option.

The purpose of capping an option is to protect the investor from unlimited losses in the event that the underlying asset price spikes sharply higher. By capping the option, the investor limits their downside risk to the premium paid for the option, plus any commissions and fees.

Capped options are often used in conjunction with other option strategies, such as covered calls or protective puts. When used in this way, the capped option can provide an extra layer of protection against a sharp move in the underlying asset price.

How much money can you make on covered calls?

Assuming the underlying stock pays no dividends, the maximum profit on a covered call is the premium received for selling the call option.

For example, let's say you own 100 shares of XYZ stock, which is currently trading at $50 per share. You sell one XYZ $50 call option for $2 per share, or $200 total. The most you can make is $200.

Here's how that would work:

- If XYZ is trading at or below $50 at expiration, the call option will expire worthless and you will keep the $200 premium.
- If XYZ is trading above $50 at expiration, the call option will be exercised and you will sell your shares at $50 per share. Your profit will be the $200 premium plus the $500 you made on the sale of the shares, for a total of $700.

Keep in mind that if XYZ is trading above $50 at expiration, you will also be required to sell your shares at $50 per share, even if the stock is trading higher than that. So, you could miss out on additional gains if the stock price continues to rise. What is an options trader salary? According to the website Wall Street Oasis, the average base salary for an options trader is approximately $130,000 per year. However, this number can vary significantly based on experience, location, and the specific employer. For instance, a senior options trader at a large investment bank may earn several million dollars per year, while a junior options trader at a smaller firm may only earn a few hundred thousand dollars per year. In addition to base salary, options traders may also receive bonuses and commissions, which can further increase their total compensation.

What is the main advantage of a capped interest rate option when taking out a mortgage?

The main advantage of a capped interest rate option when taking out a mortgage is that it protects the borrower from interest rate increases beyond a certain level. This can help to keep monthly payments affordable and reduce the overall cost of the loan.

What is the difference between fixed and capped?

Capped means that the maximum loss is limited to the premium paid for the option, no matter how far the underlying asset price falls. Fixed means that the option will pay out a set amount if the underlying asset price reaches or exceeds the strike price at expiration.

How profitable are covered calls?

Assuming the covered call is held until expiration, the trade will be profitable if the stock price stays below the strike price of the call option. If the stock price rises above the strike price, the call will be exercised and the investor will sell their shares at the strike price, resulting in a loss.