Option vs Warrant

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

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.

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