The two terms are often confusing to those new to the world of investing. It is very common to think that Financial Options and Warrants are the same product, but nothing could be further from the truth.
In this article, we are going to summarise the main differences between stock options and stock warrants, so that you can learn what these two different products look like and what objectives they have.
Options are contracts between two parties. One party is the person or institution that owns shares or wants to acquire them and the other party is the one that wants to buy or sell said shares at a certain price (Strike Price).
When we trade Options, our broker goes to the Stock Exchange Market to find a counterparty and generate the contract, which will be managed by the OCC (Options Clearing Corporation).
On the contrary, warrants are contracts between investors and the Bank or the Financial Institution that issues said warrants on behalf of the company that owns the shares on which the warrants are based.
If you operate with warrants, the said financial institution will be your counterpart, both for the purchase and for the sale. In addition, this institution acts as a Market Maker.
Companies issue warrants to stimulate the sale of their shares and hedge against a reduction in the value of the company due to a fall in the share price. Therefore, when you buy a warrant, you are helping the company that issues the warrants, regardless of whether the execution occurs or not. On the other hand, in an option operation, the company does not receive a direct benefit from the said operation. It is the investor or trader who keeps the benefits.
Options are standardised in terms of strike prices and expiration months, that is, we all play by the same rules, while warrants vary according to the needs of the company.
Options can be American (you can execute them at any time) or European (executable only on expiration), while warrants are only European. This makes the extrinsic value of the American-style options higher, which translates into credit strategies (credit trades).
And the most important advantage of Options over Warrants is that the former can be sold, while warrants can only be bought. This is extremely important, since it is precisely in the sale of derivatives where the real business is, and with warrants, only the entities that issue them can sell them.
In addition, if we want to develop strategies with spreads, options offer us a much more flexible, versatile and better option for our interests as speculators or investors.
Please note that this article is purely educational and that XTB does not offer these instruments.
This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.