What are the options?
Warrant and call are both a type of contracts, which are commonly known as security contracts. These options hedge against volatility in the market; while also speculating on the underlying security or asset value.
Options like Warrant and Call allow an investor to invest in a stock, bond, or asset without owning any of the said stock, bonds, or asset.
The options are a legal contract between the investor and the contract seller, such as a bank, that allows the investor to buy or sell an asset, stock, or bond at a fixed date in the future. Still, it does not obligate an investor to buy the underlying security.
Options are a great way to invest and speculate without exposing the investor to significant market risk.
What are Warrant Options?
The warrant is a type of options contract that allows the investor to buy or sell the secured asset or stock anytime, covered within the contract. The laws and regulations are different in different countries.
For example, a warranted contract can be used anytime covered in the United States of America contract.
In contrast, in the European Union, the warrant option can only be exercised on the expiry date. In this way, the Warrant Option is similar to the call or put option in the European Union.
One of the most significant differences between warrant and call is that companies issue warrants and are traded over the counter, unlike the call options issued by third parties such as banks.
Example of Warrant Options
Consider a warrant option issued by Company A. The price of company A’s stock is $5. The value of the Warrant Option is $1.
The expiry time of the Warrant option of Company A is one year. The price of the Warrant Contract would rise and fall according to the price of stock A.
If the price of the stock rises, then the value of the warrant contract would also rise, and if the price of the stock falls below five dollars, it would not be beneficial.
The warrant option should only be bought for companies that you believe have the potential to show growth in the future.
The warrant options are a security contract that allows the investors to diversify their risks while also minimizing their exposure to the underlying security
What are Call Options?
Calls can be almost the same as the options contract, like a warranted contract, it allows the investor to buy the security underlined in the options contract at a future date expressed in the options contract.
Investors use the call option contract when they believe that the price of securities would go up, and they want to expose themselves to any gains in the market.
Example of a call contract
Let’s take the previous example of Company A and call its stock, Stock A. But, instead of using the puts options contract, the investor uses the call option contract.
The investor is doing that because he/ she believes that the price of Stock A would rise in the future. He/ she believes that the price of Stock A would rise from ten dollars to fifteen dollars. So, the investor buys an option called a contract for one dollar.
The future data has come, and the price is exactly what the investor believed it would be, and the investor makes a profit of four dollars.
If Stock A’s price has gone in the opposite direction against the investors’ expectation, the investor would only be liable for one dollar and not a loss of five dollars if the investor had bought the stock outright.
Similarities between Warrant and Call
There are many similarities between warrant and call options. The main similarities are given as follows:
- Warrant and Call allow the investor to buy the asset written in the contract in the future at a fixed price.
- The expiry dates of both contracts are usually longer.
- Premiums are paid for both types of contracts.
Differences between Warrant and Call
As there are similarities between warrant and call options. There are also many differences between a warrant and a call. The significant differences are given as follows:
- The contract price for the Warrant contract is called the exercise price, and the contract price for the call option is called the strike price. Both are the same in nature but different in terms used for them.
- The companies issue the warrants, and the third parties issue calls.
- The warrants are traded over the counter (OTC), whereas calls are traded in the stock market.
- Warrants have a long expiry date, whereas calls have a short expiry date. Warrants can last for as long as five years.
- The exercise of warrant contracts causes dilution in the company’s stock, whereas the same does not happen when the call options are exercised.
Main factors influencing Warrants and Call contract price
The factors which influence the warrants and calls contract prices are the same. All of them are given below:
- The stock prices hugely influence how the warrant and call contracts are priced. It is very likely that the contract writer thinks the price of the stock would rise. The contract writer would charge more for it.
- The interest rates, if high, mean that the contract’s prices would also be higher.
- The longer the time of the contract, the higher the price of the contract.
- The more the volatility in the underlying stock price, the higher would be the price of the contract.
Warrant and calls are very similar and differ in only a few points. The main difference is that the company itself issues warrants, whereas third parties issued the calls.