A warrant is a security that gives the holder the opportunity to purchase common stock.  Like a right, the warrant has a subscription price; however, the subscription price is always above the current market value of the common stock when the warrant is originally issued. A warrant has a much longer life than a right — the holder of a warrant may have up to 10 years to purchase the stock at the subscription price. The long life is what makes the warrant valuable, even though the subscription price is higher than the market price of the common stock when the warrant is issued.

How Do People Get Warrants?

Units

Many times companies will issue warrants to people who purchased their common stock during its initial public offering (IPO). A common share, which comes with a warrant attached to purchase an additional common share, is known as a unit.

Need Help Passing Your Series 99 Exam?

Attached to Bonds

Many times companies will attach warrants to their bond offerings as a “sweetener” to help market the bond offering. The warrant to purchase the common stock makes the bond more attractive to the investor and may allow the company to issue the bonds with a lower coupon rate.

Secondary Market

Warrants will often trade in the secondary market just like the common stock. An investor who wishes to participate in the potential price appreciation of the common stock may elect to purchase the corporation’s warrant instead of its common shares.

Possible Outcomes of a Warrant

A warrant, like a right, may be exercised or sold by the investor. A warrant also may expire if the stock price is below the warrant’s subscription price at its expiration.

Rights vs. Warrants

  Rights Warrants
Term Up to 45 days   Up to 10 years
Subscription price Below the market    Above the market
Trading      May trade with or without common stock May trade with or without common stock or bonds
Who Issued to existing Shareholders to ensure preemptive rights Offered as a sweetener to make securities more attractive

 

Options

An option is a contract between two parties, the buyer and the seller, that determines the time and price at which a security may be bought or sold. The buyer of the option pays money, known as the option’s premium, to the seller.  For this premium the buyer obtains a right to buy or sell the security, depending on what type of option is involved in the transaction. The seller, because they received the premium from the buyer, now has an obligation to perform under that contract. Depending on the type of option involved, the seller may have an obligation to buy or sell the security.

Calls

A call option gives the buyer the right to buy or to “call” the security from the option seller at a specific price for a certain period of time. The sale of a call option obligates the seller to deliver or sell that security to the buyer at that specific price for a certain period of time.

Puts

A put option gives the buyer the right to sell or to “put” the security to the seller at a specific price for a certain period of time. The sale of a put option obligates the seller to buy the security from the buyer at that specific price for a certain period of time.

Bullish vs. Bearish

Bullish

Investors who believe that a security’s price will increase over time are said to be bullish. Investors who buy calls are bullish on the underlying security. That is, they believe that the security’s price will rise, and they have paid for the right to purchase the security at a specific price, known as the exercise price. An investor who has sold puts is also considered bullish on the security. The seller of a put has an obligation to buy the security, and therefore believes that the security’s price will rise.

Bearish

Investors who believe that a security’s price will decline are said to be bearish. The seller of a call has an obligation to sell the security to the purchaser at a specified price and believes that the security’s price will fall and is therefore bearish. The buyer of a put wants the price to drop so that they may sell the security at a higher price to the seller of the put contract. They are also considered bearish on the security.

  Calls Puts
Buyers

Bullish

Have right to buy stock,

want stock price to rise

Bearish

Have right to sell stock,

want stock price to fall

Sellers

Bearish

Have obligation to sell

 stock;

want stock  price to fall

Bullish

Have obligation to buy stock;

want stock price to rise

 

 

F. Characteristics of All Options

Related Articles
  1. Investing

    Bank Warrants Your Atttention

    Bank warrants are a lucrative way to make a bet that U.S. financials will once again be respected by the investing public.
  2. Investing

    Investing In Warrants

    Because many warrants have a long time prior to expiration, they can offer an interesting way to bet on the underlying stock.
  3. Trading

    NYIF Instructor Series: Warrants

    In this short instructional video Anton Theunissen explains what a warrant is and how it works.
  4. Investing

    What are Options Contracts?

    An explanation of options contracts, call options and put options.
  5. Investing

    Weatherford Floats New Shares, Warrants, and Notes

    Struggling energy industry services company Weatherford International (NYSE: WFT) is raising some funds the old-fashioned way -- by issuing a fresh batch of securities: The company will float ...
  6. Trading

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  7. Trading

    When Should I Sell A Put Option Vs A Call Option?

    Beginning traders often ask not when they should buy options, but rather, when they should sell them.
Frequently Asked Questions
  1. How do interest rate changes affect the profitability of the banking sector?

    Learn how interest rates affect the banking sector. When interest rates rise, the profitability of the banking sector increases.
  2. Is there a difference between capital gains and dividend income?

    Selling something for a profit leads to capital gains. A payment made by a corporations to stockholders is a dividend. Both ...
  3. What is an Islamic investment policy?

    Islamic investments are a unique form of socially responsible investments because Islam makes no division between the spiritual ...
  4. What Is The Prime Cost Formula?

    Prime costs are the costs directly attributed to the production of a product. Before calculating prime costs, direct costs ...
Trading Center