An option with an cap placed on payout or price, and which is automatically exercised when the underlying closes at or above (for a call) or at or below (for a put) the cap price. The call option’s cap price is the sum of the strike price and a specified cap interval, while the put option’s cap price is equal to the strike price plus a specified cap interval.

Examples of capped options include range forward contracts, collar loans, indexed notes, and index currency option notes (all of which are European capped options).