Capping

  

Categories: Insurance, Investing

Capping is when selling pressure is placed on a stock (or another asset) to either lower the price or keep the price low.

Capping is a strategy to game the market when someone has written a call option on an asset they are otherwise long on. Say you hold a lot of a stock (that's what it means to "be long"). You write a call option on that stock, meaning someone else pays you for the right to buy the stock at a pre-arranged price. The call option has an expiration date, so if the stock stays below the call's strike price by the expiration date, the option will end up worthless.

In capping, the person who wrote the option will sell a sizable amount of the stock they own in order to create downward pressure on the stock. They are thus capping its price. If it works out, the option will expire without getting exercised.

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Finance: What is a Wrap Account?31 Views

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Finance allah shmoop what is a rap account Okay yeah

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yeah inserted joke about eminem here a rap account with

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a w wraps into one annual fee All of the

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services you'd normally pay for ala carte at a given

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brokerage that is a broker might charge you a one

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percent rap account fee to manage all the assets you

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have with her in return for things like quote no

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fee unquote access to their proprietary mutual funds you get

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toe by the mutual funds no load and the quotes

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air there because there is a fee annually to manage

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the fund But at least this way there is no

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fee to buy into the fund or no load their

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god it see how that works The rap account can

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also include unlimited trading at quote no fee unquote as

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well like quotes or there again because there's usually a

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spread on each trade like you buy a twenty eight

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dollars and twenty seven cents and you sell a twenty

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eight dollars in nineteen cents So there's a seat since

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spread they're they're still making money on each trade There

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just isn't an incremental fee tacked on top of all

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That so your broker khun get that second home in

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the hamptons and that one percent feet Well that's based

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on the total amount invested with the broker got it

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So if you have a million dollars invested with them

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it's ten grand a year for that rap account fi

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system we'll wrap accounts often come with minimum investment levels

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well above those of a mutual fund like twenty five

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fifty grand or more But in having a one feet

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covers all approach a broker is not incentivized to churn

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the account or do really anything to generate commissions for

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themselves because there ain't any The only thing they're incentivized

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to dio is gather more of your assets or make

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your assets be worth more so they can keep going

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on the whole one percent dance Yeah the notion goes

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in theory anyway that if the broker helps client invest

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well over time the client will remain a loyal one

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and stay with that broker for a very long high

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margin to the brokers Time for many large brokerages rap

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accounts allowed their clients to be able to buy various

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flavors of funds mutual hedge or index at quote wholesale

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Prices unquote That is if the fund is a captive

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fund maintained by the brokerage The rap account allows the

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client to buy with no commissioner upfront charges which is

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kind of a nice nice deal for him Yeah quick

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example If jay z gives his broker one hundred million

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dollars under a rap account that charges one percent the

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broker will charge a million bucks a year in return

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for handling all of jay z's trading wiring and a

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whole bunch of other services got it One percent on

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the hundred million broker makes million bucks a year and

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