If you are the holder of a classic warrant, you have the right (bot not the obligation) to buy the underlying stock at a fixed price. A classic warrant is attached to a bond, as an extra bonus.
When can I exercise my warrant?
- If you have an American-style warrant, you can exercise it any day until it expires.
- If you have a European-style warrant, you can only exercise it on its expiration date.
Different types of warrants
There are many different types of warrants. The traditional type, known as classic warrant, is issued in conjunction with a bond. (This bond is thus a warrant-linked bond.) The underlying asset is a share or shares in the entity that issued the bond.
A warrant that is issued without being attached to a bond is called a naked warrant. Naked warrants are typically issued by banks or by firms that specializes in securities.
A covered warrant is a warrant that has underlying backing. The issuer of this warrant may for instance have purchased enough shares to cover the warrant.
Even though most warrants will give the holder the right to buy (so called callable warrants), there are also warrants that give the holder the right to sell. Warrants that give the holder the right to sell are known as put warrants or puttable warrants.
In addition to the warrants mentioned above, there are many other types of warrants available. Unusual warrants are typically referred to as exotic warrants. Examples of warrants that fall within this category are the snail warrant, the turbo warrant and the hit warrant.
Classic warrants vs. equity call options
At first glance, a classic warrant can look very similar to an equity call option. After all, they both give the holder the right – but not the obligation – to buy the underlying equity. They also come with an expiration date and become useless once expired.
There are however notable differences between classic warrants and equity call options. For starters, classic warrants are typically issued by the corporation on which the warrant is based. Equity call options are on the other hand typically issued by a third party, such as an options exchange. If you elect to exercise your classic warrant, the corporation on which the warrant is based will issue new shares to make it possible for you to buy shares. If you elect to exercise your equity call option, the shares that you purchase are existing shares – not shares issued specifically for you to buy. As you can see, stock dilution occurs every time someone exercises a classic warrant. N.B! In this regard, employee stock options (a type of equity call option) are more similar to classic warrants that to ordinary equity call options.
When equity call options are issued, they are normally given a lifespan of a few months or less. Long-term equity anticipation securities (a type of options) are the exception, with a normal lifespan of 2-3 years. For classical warrants, having a lifespan of several years is the norm. It is not difficult to find newly issued warrants where the expiration date is 10 years into the future.
When it comes to trading, both classical warrants and equity call options are traded on secondary markets. It is much more common for options than warrants to be traded on exchanges, although both options and warrants are traded over the counter (OTC) as well. If you want to find exchange-listed warrants, you need to seek out one of the few exchanges that list warrants, such as the Hong Kong Stock Exchange or the Deutsche Börse.