Capping Definition

[Igor 10]

In trading, a trader can potentially increase the size of leveraged positions in order to benefit maximally from trade opportunities that present themselves. However, leverage build-up is a double-edged sword which can be potentially damaging if the trades that present extra leverage do not go in the trader's direction.

[tradelab 10]

DEFINITION OF 'CAPPING'

1. The practice of selling large amounts of a commodity or security close to the options expiry date in order to prevent a rise in market price.

 

2. An attempt to keep a stock's price low or move its price lower by putting selling pressure on it.

 

In other words

 

1. The investor who might practice capping is a call option writer. If practicing capping, he or she is trying to avoid having to transfer the underlying security or commodity to the option holder. The goal is to have the option expire worthless so that the premium initially received by the writer is protected.

 

2. This is a violation of NASD rules.