By definition, a cap is a series of options called caplets, each written on a specific forward interest rate. In contrast, a swaption is one option written on a collection of all forward interest rates in a given forward swap. More specifically, the cap constitutes a basket of options (caplets) on forward rates/ prices while the swaption is an option on a basket represented by the swap rate (it is a weighted average of forward rates). It follows that the volatility of a swaption is lower than that of a cap because the averaged rates are less volatile than the individual (uncorrelated) rates. This creates a gap between the volatilities of caps and swaptions which in turn provides an opportunity for investors to take views on future correlations and accordingly execute their trades.

Broadly speaking, a swaption is similar to a a cap or a floor in that it consists of a series of options. However, the individual caplets and floorlets are evaluated at different value points of the underlying asset corresponding to the different expiration dates, whereas the individual options in a swaption all have the same value for the underlying asset, i.e., the current fixed rate of the swap on the swaption’s expiration date.