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.
Notes: 1. The investor who might practice capping is a call option writer. If practising 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.
Most of us have perceived option 2 to be in play at one time or another, where a rather large amount of shares are put up for sale, just above the trading range, forcing impatient sellers to go beneath that price. The capper, it is thought, then picks up those shares because his intent was never to sell the amount of shares up higher, merely to obtain more shares cheaper. Sometimes this is not the case, however, and a seller simply wants out and puts perhaps their entire holding up for sale at the one time.
Capping can work to your advantage, however, if you wish to obtain more shares. By forcing impatient sellers to move to a lower price, you can, in fact, enjoy the benefit of the capper's work and sit in the queue waiting to collect those shares. Once your buy orders are filled, you tend to have a different view of the capper, and wish he/she would remove their sell order, in order for the price to move higher.
