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What is the difference between options and warrants?


Warrants are similar to options but there are few key differences. Warrants are derivatives that give the right but not the obligation to the holder to buy or sell security before expiration date. The price at which underlying security can be bought is called strike price and should be bought before an expiration date. Like option there are call warrants that give holder the right to buy a security and pit warrants that give the right to sell security. Underlying securities are commonly equity but they can also be currencies, commodities and other financial instruments.

Warrants are issued directly by the company and not the third party. Investors can write options but they can't write warrants. Finding and trading warrants is also more difficult because they usually trade on over-the-counter market and not stock exchanges. If they however trade on exchange they have a thicker of an underlying stock but with letter W attached at the end of the ticker. Warrants are dilutive meaning when holder exercises a warrant they receive a newly issued stock so the stock price will be diluted. Period between issuance and expiration of warrant is longer than that of option. It is usually measured in years while an option expiration date is usually shorter, expressed in months. Warrants don;t come with dividends or voting rights but they are attractive to investors because they provide a way leverage their position.

Traditionally, warrants are issued with bonds or preferred shares but they can be detached and sold separately. on the secondary market. This is done to encourage demand for debt securities. Rights to buy or sell underlying asset at a certain price within certain time frame can be attractive to certain investor not interested in fixed income securities. Bond issuers use warrants to obtain lower interest rates which will otherwise be impossible. Also, bond buyer is attracted to the fact that he can earn on a trade difference if he exercises the warrant but keep the bond. Opposite from detachable warrant are wedding warrants where you have to surrender bond or preferred stock that is attached in order to exercise the warrant.

Naked warrants are issued on their own and are issued by financial institutions and can be traded on stock exchange. They are not issued with bonds but can have other underlying securities. They are also called covered warrants because financial institutions already owns them so new stock will be issued.
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