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There are significant differences between warrants and options. If you want to trade successfully, it is essential that you understand these differences.
As a trader and investor, you are faced with the agony of choice these days. Which financial instrument should I choose?
Which product is easy to understand, safe, reliable and gives me a decent return?
When I look at the menu bar on common financial portals like Onvista, I often can’t see the wood for the trees.
The certificate landscape alone is constantly being expanded. But by whom, actually?
The issuers of these securities are mainly banks. They assign extremely creative names such as sprint, basket or discount certificates and assign a security identification number to the paper.
Besides these still rather boring investment products, private investors can also trade leverage certificates.
One of the most popular leveraged financial instruments is the warrant. Unfortunately…
Because with this financial instrument vast sums of money are literally burned. I have here a detailed article on the functioning of warrants.
In this article we will primarily focus on the comparison between warrants and options.
There are serious differences between the two financial instruments, which traders must be aware of and understand if they want to trade successfully with one of the instruments.
Basically, both products are transactions with the future. They are both contracts that certify the right to buy (call) or sell (put) an underlying asset at a price fixed today (strike price).
But options can be used to trade many more strategies. During my studies I struggled with the calculation of the fair option price. At this point I would like to thank the gentlemen Black and Scholes.
But the construction of options or warrants is not the topic of today.
We will now look at the 4 most obvious differences between warrants and options.
1. difference between warrants and options – issuer
Warrants are issued by banks. They are securities with their own WKN. As a rule, I can trade the warrants OTC, i.e. over the counter at the issuer’s premises.
Options are not published by an issuer, but are introduced by a derivatives exchange like Eurex. The exchange acts as a counterparty between buyer and seller. It gives a guarantee for the agreed payment and requires a security margin in return.
2. difference between warrants and options – construction
Banks can construct their warrants at will. There are therefore a large number of products on the market that can differ considerably despite having the same underlying and strike price.
Options, on the other hand, are standardised and more transparent. Each option series has a fixed term, subscription ratio and trading venue.
3. difference between warrants and options – trading venue
Due to their security character, warrants can be traded on the usual stock exchanges such as Xetra and Co. or, as mentioned, OTC. To do this, you need a classic securities account at your house bank or an online broker.
Options are traded (only) on futures and options exchanges such as Eurex and are standardised in terms of strike price, term and contract size. The derivatives exchange provides the platform for the exchange of rights and obligations. Banks act as market makers and thus ensure sufficient liquidity.
You need a special options broker or an online broker who enables you to trade options. There is no WKN!
4. difference between warrants and options – strategies
When trading with warrants I have two trading options. I can bet on rising prices with a call and bet on falling prices with a put.
A call denotes the right to buy the underlying asset. A put, on the other hand, denotes the right to sell the underlying asset.
In the case of options trading, option writer transactions can also be concluded. This in turn describes the sale of options. The buyer must pay the seller an option premium, which depends on the volatility of the underlying asset.
It is important to know these differences but also the detailed characteristics if one wants to trade one of the two financial instruments.
In my opinion, classical options should be preferred to trading warrants, as there is greater transparency and less risk.
This risk describes the insolvency risk and the issuer’s design risk for warrants rather than volatility. This in turn is present in both vehicles and can lead to losses of the capital invested.
The topic of options is very exciting and versatile. Anyone who wants to delve deeper into the subject will find enough specialist literature on the Internet to broaden their knowledge.
Finally, a number I picked up from industry insiders that should make you think:
75% of all warrants are written off worthless. Is it the skill of the issuer who acts as a writer? Or the naivety of private traders?
Probably the truth lies, as always, somewhere in the middle.