Warrant 101

Q & AWarrant 101
Jimmy Ng asked 6 months ago

Hi KC & Peter,
I have some questions regarding warrants:

  1. What is the exact difference between option and warrant? What makes a company issue warrant?
  2. If you own warrants, be it bought or bonus given, is there indicator(s) the right time to sell or to exercise it?
  3. Following Question2, from these point of views:
    1. considering the capital gain from:
      1. selling warrant (there is expiration date)
      2. exercised to mother share (no expiration date)
    2. Dividend income after exercising
    3. Dilution of mother share value after exercising (at some point, major shareholders also keep exercising, why?)
    4. The relation of it against mother share intrinsic value
  4. If found a good company should you start investing in warrant or mother share?
    1. When is better with warrant
    2. When is better with mother share

In short, it is ‘when to do what’ generally regarding warrant.
Thank you.
Jimmy

1 Answers
Peter Lim Staff answered 5 months ago

1. What is the exact difference between option and warrant? What makes a company issue warrant?
he Difference in Warrants and Calls
Three major differences between warrants and call options are:

Issuer: Warrants are issued by a specific company, while exchange-traded options are issued by an exchange such as the Chicago Board Options Exchange in the U.S. or the Montreal Exchange in Canada. As a result, warrants have few standardized features, while exchange-traded options are more standardized in certain aspects, such as expiration periods and the number of shares per option contract (typically 100).1
Maturity: Warrants usually have longer maturity periods than options. While warrants generally expire in one to two years, they can sometimes have maturities well in excess of five years. In contrast, call options have maturities ranging from a few weeks or months to about a year or two; the majority expire within a month. Longer-dated options are likely to be quite illiquid.
Dilution: Warrants cause dilution because a company is obligated to issue new stock when a warrant is exercised. Exercising a call option does not involve issuing new stock since a call option is a derivative instrument on an existing common share of the company.
Source: https://www.investopedia.com/articles/investing/071513/warrants-and-call-options.asp

If you own warrants, be it bought or bonus given, is there indicator(s) the right time to sell or to exercise it?
No, Perhaps you’re confused between fundamental and technical analysis. This course is not on Technical analysis/ charts where their main focus is “time” rather than pricing.

Following Question2, from these point of views:
considering the capital gain from:
selling warrant (there is expiration date)
exercised to mother share (no expiration date)
Dividend income after exercising
Dilution of mother share value after exercising (at some point, major shareholders also keep exercising, why?)
The relation of it against mother share intrinsic value
If found a good company should you start investing in warrant or mother share?
When is better with warrant
When is better with mother share
In short, it is ‘when to do what’ generally regarding warrant.
Thank you.
Jimmy

If you are a baby, don’t start by running. Start by crawling, then walk, then only run. Likewise, focus on stocks first. Leave warrants for later, much much later.

Peter Lynch (one of the greatest investors of all time) said that he don’t even want to explain what is Warrants or Options in his book because he believe most investors are better off not knowing about these stuffs (especially if you’re not a seasoned investor).