Warrant
Also known as: Covered warrant, Company warrant
An option in retail packaging — securitised, listed, and buyable in small size through any broker.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
A warrant is essentially an option wrapped as a tradable security. Instead of opening an options account, you buy the warrant like a share through your normal broker; it gives the right to buy (call warrant) or sell (put warrant) an underlying at a set strike until expiry.
Two very different species share the name:
- Covered warrants — issued in huge variety by banks on stocks, indices, currencies and commodities; hugely popular with retail investors in Germany, Hong Kong and elsewhere.
- Company warrants — issued by the company itself (often attached to bonds, IPOs or SPACs as a "sweetener"); exercising them creates new shares.
The appeal is gearing: a small stake controls a large exposure, multiplying percentage gains — and losses, down to zero.
Point at a line to pick it out from the others.
a paymentsomething deliveredonly if a condition is met
The difference is the party at the other end: an option is written by another investor, a warrant by the company itself.
At issue
- The holder → The issuer Bought outright, or attached to a bond as a sweetener and stripped off afterwards.
If exercised
- The holder → The issuer Paid to the company, which receives new money — something that never happens when a listed option is exercised.
- The issuer → The holder The company issues shares that did not exist before. The share count rises and every existing holder's slice shrinks.
If not
- The issuer → The holder The holder loses the purchase price and nothing else; the company keeps it.
- Asset class
- Equity derivatives
- Instrument type
- Securitised option
- Traded
- Exchange (as securities)
- Typical users
- Retail investors (esp. Europe/Asia), companies raising capital
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketdecides it
- Creditmatters
- Liquiditymatters
- Fundingbarely applies
- Operationalbarely applies
What decides it here. Market risk with a deadline, and an issuer that must still be there to deliver the shares — unlike a listed option, this one is written by the company.
3 · IntermediateHow it works in practice
What the term sheet hides
- Ratio: warrants often cover a fraction of a share (ratio 0.1 = ten warrants per share) — headline prices look deceptively cheap.
- Pricing power: the issuer is the market maker; spreads and implied volatility are set by them. Comparing IV across issuers is the informed buyer's defence.
- Credit: a covered warrant is an unsecured claim on the issuing bank (Lehman's warrant holders learned this).
Company warrants dilute
When corporate warrants are exercised the company issues new shares and receives the strike as fresh capital. Existing holders are diluted — so valuing the company's equity must account for the warrant overhang (SPAC investors in 2021 discovered how much this matters).
Gearing measures
Simple gearing = spot / (warrant price ÷ ratio). Effective gearing (elasticity) = gearing × delta — the true % move in the warrant per 1% in the underlying.
4 · AdvancedPricing & valuation
Covered warrants: Black–Scholes plus adjustments
Bank-issued warrants are priced as vanilla (sometimes barrier) options with the issuer's marks: \(W = \text{ratio} \times BS(S, K, \sigma_{issuer}, T, r, q)\). The retail-facing margin sits in \(\sigma_{issuer}\) and the spread; empirically, retail-heavy strikes/maturities carry higher IV than the listed-options equivalent.
Company warrants: dilution-adjusted pricing
With \(n\) shares outstanding and \(m\) warrants of strike \(K\), exercising delivers a fraction of the post-money firm. The classic adjustment prices the warrant on the diluted firm value:
What the symbols mean
- nhow many periods, or how many things
- Cthe price of a call option
- Sthe price of the underlying today
- Va value
- Kthe strike: the price written into the contract
where \(V\) is firm equity value including warrant proceeds. In practice, \(V\) itself depends on \(W\), so the equation solves iteratively. For long maturities (5+ years, typical for corporate warrants), inputs shift from trading desks' surfaces to fundamental volatility estimates.
Barrier variants
The retail market's favourite: knock-out warrants ("turbos") die permanently if spot touches a barrier. Their value is nearly intrinsic, \(W \approx (S - K)\times\text{ratio}\), with tiny time value — priced via barrier-option formulas (reflection principle) plus a gap-risk premium for overnight jumps through the barrier.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give Warrant in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.
Put Warrant beside any other instrument →
Where this instrument shows up elsewhere
- EasyLeverageConceptsBorrowed money does not change what an asset earns
- EasyWhat does leverage mean, and why is it dangerous?QuestionsControlling more than you paid for
- MediumWhere the Leverage HidesAnalysisBorrowed money is the obvious form and the least common