Derivatives · Intermediate · 4 min

Warrants vs. options

You can explain how warrants work like options but differ in who issues them, who quotes their prices and which risks that adds.

Option or warrant?

In the US, private investors who want calls and puts trade listed options. In Germany and several other European countries, many trade warrants instead. On a chart, both behave very similarly.

But they are built by different people, under different rules. Those differences decide who sets the price you pay and what happens if something goes wrong. This lesson compares the two.

Same idea, different builder

A warrant is a security issued by a bank that gives its holder an option-like payoff: a call warrant gains when the underlying rises above the strike, a put warrant when it falls below. It has a strike, an expiry and, like options, intrinsic and time value.

The differences to listed options:

Issuer. Listed options are standardized contracts on an exchange, cleared by a clearing house, with many buyers and sellers. Warrants are issued by a single bank, which sets the terms.
Quotes. For warrants, the issuer usually acts as market maker and quotes both the bid and the ask for its own product. The spread and the pricing of time value are its decisions, within exchange rules.
No writing. Investors can buy and sell existing warrants, but not create new ones. Only the issuer can.
Ratio. The ratio states how many units of the underlying one warrant refers to. A ratio of 0.1 means ten warrants equal one share, which is why warrant prices often look small.
Issuer risk. As the lesson on issuer risk explained, a warrant is a claim on the issuer. BaFin warns that a total loss threatens if the issuer becomes insolvent, and deposit protection does not apply.

Warrants make option-like products accessible in small amounts through a normal securities account. The price for that is dependence on one bank, both for quotes and for payment.

(120 − 100) × 0.1 = 2

A fictional call warrant on a share has a strike of 100, a ratio of 0.1 and expires in six months. It trades at 1.20.

At expiry, the share is at 120. Each warrant pays (120 − 100) × 0.1 = 2.00.
The investor paid 1.20, so the gain is 0.80 per warrant.
If the share had ended at 100 or below, the warrant would have expired worthless.

During its life, the warrant's price also depended on time value and implied volatility, priced by the issuer, as covered in the lessons on options.

Common mistakes

Forgetting the ratio. It changes what one warrant is worth.
Ignoring the issuer. Its quotes and its solvency matter.
Comparing warrant prices without volatility. Issuers price time value differently.
Trading outside the underlying's market hours. Spreads are usually wider then.

The takeaway

A warrant is an option packaged as a security by a bank. The issuer sets the terms and quotes the prices, and its solvency is part of the risk.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the product whose price is mostly quoted by the company that issued it.

Tap the chart.

For warrants, the issuing bank usually acts as market maker, quoting the bid and ask for its own product.
2A call warrant has a ratio of 0.1. What does that mean?

With a ratio of 0.1, ten warrants equal one share. Its price is roughly a tenth of a comparable option on one share.
3Can a private investor sell (write) a warrant?

Unlike listed options, warrants are issued by banks. Investors cannot write new ones.
4What happens to a warrant if the issuer becomes insolvent?

BaFin warns that warrants and certificates can suffer a total loss if the issuer fails.

of 4 correct.