There are significant and very important differences between stock warrants and stock options.

Definitions of stock warrants I have found on the web and in books provide a basic description of stock warrants. But, not knowing the differences between a warrant and option can severely impact a warrant trader or investor and by that I mean not knowing what you are doing can cost you a lot of money! The differences arise from the fact that the call options most U.

Stock warrants, on the other hand, are issued by the underlying company and are not standardized. The result is that there can be major differences in a warrant and call option that may seem to have similar, or even the exact same, terms. The strike price for stock warrants and equity options is the price at which you can purchase the underlying stock upon delivery of your warrant or option and some dollar amount.

A warrant will also have a strike price, but this strike price can differ from an option strike price in several ways. First, the strike price for a warrant may include not only a cash amount but other securities. In some instances, an underlying common stock will have more than one warrant class, such as a class A warrant and a class B warrant.

These warrants will generally have different strike prices and may include in the strike terms a reference to the other warrant. Second, the company issuing the warrants can change the strike terms. Yes, you read that correctly, THE COMPANY CAN CHANGE THE STRIKE TERMS. While you will never wake up to find the strike price changed on your Apple AAPL call options, it is possible, and not uncommon, to find your strike terms have changed in a warrant position.

In every instance in which I have seen this take place, the change is in favor of the warrant holder. In other words, the strike price or terms are more favorable because the strike has been reduced. For a few reasons why a company might do this, see my upcoming ebook. A warrant, like a call option, will also have an expiration date. The warrant must be exercised by this date or it will expire worthless. Call options are issued at specific times for a defined time period. For instance, call options can have weekly, monthly, or longer term time periods LEAPs in which they are exercisable.

Warrants may be issued at any time, either as part of an IPO, or as a secondary offering, or even as part of litigation concerning the company. Similar to the price terms of a standard call option, the expiration date for a call option will not change.

The expiration date of a warrant, however, can be changed by the issuing company. Again, it is not uncommon for a company to extend the time in which a warrant can be exercised. A warrant, when exercised, normally results in a cash infusion into the issuing company unless the exercise is non-cash , and therefore it benefits the company when the warrant is exercised.

This is different from a call option which when exercised gives no direct benefit to the company. Retaining the possibility of this cash infusion, from the exercise of warrants at some point in the future, is one reason a company might extend the date and give additional time to exercise the warrant.

Usually when this is a feature of a warrant, there is some price at which the underlying common stock must trade above in order for the company to call the warrant. These terms are spelled out in the SEC filings necessary to register the warrant.

How are stock warrants different from stock options?

The most important thing to know about a warrant, other than the expiration date and strike price, is whether or not the warrant is currently exercisable. This is a major difference between warrants and call options, and it can cost even experienced arbitrage traders money.

While call options are always exercisable though from a financial standpoint exercise may not be advisable , warrants are only exercisable if a current registration statement, filed with the SEC , is in effect. A warrant often has a specified time in which it is not exercisable immediately after issuance.

Generally this time runs from three to six months if it is part of the warrant terms. The registration statement will contain these terms. But, even after this time period expires, a warrant may or may not be exercisable. This can make for a very costly trap for the uninitiated.

What Is the Difference Between Warrants and Options? | Startup Law Blog

Imagine you find a warrant with the following terms: Not so fast Gordon Gecko. And, if the common begins to rise, which causes a loss in your account, the unexercisable warrant will likely not rise in unison with it. You will lose money as your short position rises and not make that loss up on your long warrant position. You can make a determination as to whether a warrant is exercisable in a few different ways. First, you can contact your broker who will look up the warrant on a Bloomberg terminal to see if it is listed as exercisable.

Second, you can contact the issuing company and ask them if it is exercisable. Third, you can contact The Depository Trust Company DTC through which many but not all warrants are exercised. If they are the agent charged with converting your warrant they will know if it is exercisable.

While there are other differences between stock warrants and options, these are the major differences which can impact your investing or trading in warrants. It should be clear at this point that these differences are significant and should be thoroughly understood before investing in stock warrants, or engaging in warrant arbitrage.

Stock warrants, as non-standardized instruments, can be more complicated than call options. But, putting in a little time to understand the nuances can be a profitable endeavor for either a warrant investor or trader. To receive free updates on new and existing stock warrants that we see as potentially profitable, as well as our exclusive report on how to profit from a warrant expiration, enter your name and email in the box below and hit submit.

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