Warrants Vs Call Options – Similarities and Key Differences

Warrants and call options are both similar in several ways. These instruments give a holder the right but not the obligation to buy shares of a company at a specified period on or before the maturity date. They function similarly with holders looking to make profits or use these instruments for tax advantages.

There are certain differences in Warrant and call options as well. For instance, with warrants, a company would issue new shares if the holder exercises the right. On the other hand, call options do not offer dilution of shares. There are other key differences in both the instruments as well.

What are Warrants?

Stock warrants give the holder a right but not an obligation to buy stocks at a specific period. The Warrant rights can be exercised on or before the maturity date.

Warrants are attached to instruments such as bonds or stocks to attract new investments. The additional benefit is termed as a “sweetener” for the investors. Warrants are issued by the company itself, unlike options issued by an exchange.

Warrants come with a longer maturity period. Also, warrants do not offer dividends and voting rights to investors. As warrants are issued and traded directly by the company, they are considered illiquid as compared to call options.

Warrants come with different features and types. Naked warrants are issued separately without an underlying asset such as a bond. Covered bonds are issued through financial institutes rather than the company itself. Detachable warrants can be detached from the underlying asset. Contrarily, wedded warrants cannot be detached from the security.

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What is a Call Option?

A call option is a derivative instrument that is referred to the contract that gives the holder a right but not the obligation to buy an underlying security at a specified price and on or before a specific date. The underlying security can be a stock, bond, or other financial instruments.

Call options come with standardized contracts. A stock call option contract gives the holder a right to buy 100 stocks. These contracts come with standard costs that investors have to pay irrespective of the exercise option.

In the call option, the exercise price refers to the price at which the option can be exercised. The difference between the strike price and the market price is called the premium of the option. An investor would make money with a call option if the price of the underlying asset increases.

Similarities in Warrants and Call Options

Warrants and call options are similar in many ways. For instance, both contracts give the holder rights to buy an underlying asset, not the obligation.

Here are some key similarities in both options.

  • Both contracts do not offer any control over the underlying asset until the option is exercised.
  • Both contracts offer a guaranteed price called strike or exercise price at which the holder can buy the underlying asset at or before a specified date.
  • These contracts come with specified terms such as price and maturity date.
  • Both contracts can be traded as marketable securities and the difference in strike price and market price becomes the premium for the holder.
  • Similar factors influence the pricing options and warrants such as asset volatility, economic factors affecting the asset’s price, trading volume, etc.
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Key Differences between Warrants and Call Options

Call options are widely used and traded as compared to warrants. Options can be used for hedging, speculations, and tax advantages. Warrants are issued directly by the company itself and traded directly most often. Thus, options are liquid instruments with better profit opportunities.

Here are some other key differences between warrants and call options.

  • Warrants are issued by the company, often as a sweetener for investors. Options are exchange-traded instruments and issued by exchanges rather than a company.
  • Options come with standardized features such as standard contracts of 100 stocks. Whereas warrants are issued with non-standardized contracts.
  • Warrants would cause dilution of stocks for a company, as new shares would be issued if the holder exercises the warrant. Call options do not cause dilution as these are issued for existing stocks.
  • Warrants come with longer maturity terms often in years, whereas the call options are issued with a shorter maturity period of months or a few days.
  • For various reasons, warrants and options come with different underlying assets. For instance, warrants come with international stocks and currencies. While options are offered for domestic bonds, stocks, commodities, etc.
  • Although it is possible to issue naked warrants independently, however, warrants are often issued in combination with an underlying asset. Options are frequently issued without an underlying asset.
  • Warrants do not offer as many liquidity features as options. Options can be traded widely shorted, bought, and written with hedging and trading strategies.

Conclusion

Warrants and call options are contracts with varying legal formats. Both of these contracts give the holder a right but not an obligation to buy an underlying asset at a specific price on or before a specific date. Warrants are primarily issued for raising capital and options are often issued for trading, hedging, and speculation purposes.

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