Difference Between Option vs Warrant
“Options” are derivative products which allow the buyer a right to exercise an action (of buying or selling) for the underlying asset on or before a specified date at a specified price (also called as the strike price), and an obligation to the seller to fulfil the transaction once the buyer exercises its right.
There are 2 basic types of options – Call and Put.
A “Call” option gives the buyer a right (and not the obligation) to buy the underlying asset at a particular strike on a particular date.
A “Put” option gives the buyer a right (and not the obligation) to sell the underlying asset at a particular strike on a particular date.
Depending upon the then current spot price of the asset at maturity of the option, the buyer can take a decision whether to exercise the option or not in order to make profits (or limit the loss).
“Warrants” are derivative products as well, which allow the buyer to buy or sell stocks of the company issuing warrants, at a specified price on a later date prior to the expiration of such warrant. They are very similar to Options, with the 2 basic types being “Callable” and “Puttable” warrants.
Option vs Warrant Infographics
Below is the top 8 difference between Option vs Warrant
Key Differences between Option vs Warrant
Both Option vs Warrant are popular choices in the market; let us discuss some of the major Difference Between Option vs Warrant:
- Both Option vs Warrant products gives the buyer a right to exercise the required action (of buying or selling the underlying) on a future date at a specified price, however before the maturity date of the respective product.
- Option vs Warrant, as both provide special rights to buyers, they are sold with a premium charged to the buyer. The premium is determined based on the time value and intrinsic value of the underlying in the market in both cases.
- Both Option vs Warrant products have a respectively fixed expiration date, a fixed strike price for the underlying, and are traded with similar procedures if the buyer wishes to exercise its right.
- Price of the warrant, as similar to the price of an option increases with the time to maturity and goes on decreasing as the maturity nears. Moreover, if these products are not exercised by the maturity date, they expire leaving the buyer with a loss equal to the premium it paid to buy the respective product.
- Both Option vs Warrant products intend to minimize the risk of losses to the buyer, limited only to the premium paid by them, and if a market is favorable and the buyer exercises its rights they can make unlimited profits.
- Option vs Warrant, both come with time to exercise features; and thus being either American style or European style. With an American style the buyer can exercise its right at any time before maturity, while with a European style, he can exercise its right only at the maturity of such product.
- Both Option vs Warrant products are derivatives with a particular underlying, and are priced based on the price of their underlying asset; both of these are created for the benefit of selling the underlying asset.
- Both give the buyer liberty to only purchase the derivative (option or warrant), without necessarily having to buy the underlying. Buyer may or may not buy the underlying asset and be able to hedge the risk with buying a suitable option or a warrant.
Head To Head Comparison between Option vs Warrant
Below is the topmost comparison between Option vs Warrant
|Options are exchange-traded products. They are regulated by the exchange, and features of the different options are also fixed by the exchange.||Warrants are generally over-the-counter (OTC) products. A few companies may list them on an exchange as well though in order to publicize the underlying stock for marketing purposes, mostly they are traded by broking firms.|
|Options have a variety of underlying products like, bonds, equities, interest rates, currency or even commodity, and sometimes secondary derivatives having swaps as underlying (in which case they are called swaptions).||Warrants generally have to underlie as stocks of the company which issues warrants.|
|The seller of an option can be any party trading on the market, need not necessarily be the issuer of the underlying security.||In case of warrants, the seller is the company itself which issues the underlying stocks that buyer can buy on a future date.|
|As the product is exchange-traded, the price of the option can be discovered and tracked.||Price of the warrant is difficult to be discovered as it is an OTC product, and may be based on the discretion of the seller.|
|Options may be traded for a shorter period of time, as they are very volatile products.||Warrants are generally traded for long periods (in years).|
|Options are standardized products since they are exchange-traded, and the features are set by the exchange.||Warrants are not standardized – features depend upon the issuer or the seller, and accordingly profits to be made are determined by the buyer.|
|There is no intention by the seller to market the underlying by selling the option. It may just be for the purpose of hedging their risk, or speculation or even arbitrage.||Upon selling a warrant, the issuing company may link it to their bonds issued or to publicize selling of the underlying share which is to be introduced into markets in future.|
|Options can be easily traded by approaching the exchange or hiring a broker/intermediary party. They can be traded in volumes with a purpose of hedging risk/speculation/arbitration, and which may also lead to a bubble in an economy.||Issuance of warrants is very much controlled by the issuing entity and does not lead to uncontrollable trading.|
Option vs Warrant – Final Thoughts
Trading into options or warrants must be done with proper and in-depth analysis by investors. Such products move with market sentiments and hence need to be regularly tracked. As each product has its own merits and demerits, they need to be carefully studied and then invested in.
This has a been a guide to the top difference between Option vs Warrant. Here we also discuss the Option vs Warrant key differences with infographics, and comparison table. You may also have a look at the following articles –