What are Warrants? – Explained

Warrants belong to the group of leveraged products and are therefore also exchange-traded securities. The securities are a form of a right that can be traded on the stock exchange. They are therefore securitised options, also known as warrants.

The investor receives the right to buy (call) or sell (put) the underlying instrument on or during a certain period at a previously agreed price.

In detail, warrants certify the following right:

  • a specific underlying asset, also known as an underlying (shares, bonds, currencies or an index)
  • according to a certain subscription ratio
  • at a predetermined strike price
  • within a fixed subscription period (in the case of American options) or at the end of a subscription period (for European options)
  • to buy (call option) or to sell (put option)

The underlying is the financial instrument underlying a warrant.

The subscription ratio indicates how many units of an underlying asset can be bought or sold with a warrant.

The exercise price is also known as the strike price. It indicates at what price the holder of the warrant can exercise his or her option right.

What is a call warrant?

A call warrant allows you to bet on rising prices. The investor receives the right to receive a certain number of the underlying asset from a contractual partner. The delivery of the underlying is not always provided for and therefore a cash settlement is often made, which is based on the current price and the strike price.

The price of a call warrant usually also increases if the underlying asset rises. However, other influencing factors must also be taken into account here.

What is a put warrant?

A put warrant allows you to bet on falling prices. The investor receives the right to deliver a certain number of the underlying instrument to his contractual partner. The delivery of the underlying asset is not always provided for and thus often there is also a cash settlement, which results from the strike price and the current price.

The price of a put warrant usually increases when the underlying asset falls. However, other influencing factors must also be taken into account here.

What is the difference between options and warrants?

Options can be “written” by any market participant. In the case of warrants, this is only done by the banks, which are therefore also the issuers of the warrants. In the case of warrants, there is therefore also the issuer risk, which is not the case with options. Here one is secured by the margin.

Also warrants are not standardized in contrast to options. Here the issuers can decide freely. Stock options, for example, always refer to 100 units of an underlying asset.

In addition, warrants do not allow the short position to be taken. This is taken by the issuer. It is therefore not possible to write and collect option premiums on warrants.

Options are traded on the derivatives exchange. Warrants are traded on the Stuttgart or Frankfurt stock exchanges. However, the counterpart is always the issuer and not a “normal” market participant as with options.

Where can I search for warrants?

There are various warrant finders that can help you find the “right” warrant.

The most common warrant finders are currently the following:

  • Comdirect
  • Financial meeting place
  • Finances100
  • Onvista
  • stock exchange.com
  • Wall Street online
  • Stuttgart Stock Exchange
  • stock exchange-Online.de

With the help of the warrant finder, you can search for warrants that match your own investment horizon and risk tolerance.

Where can I find a warrant calculator?

The pricing of warrants depends on various factors. In order to calculate the effects of the influencing factors and to better understand the warrant’s behavior in different scenarios, warrant calculators help you to better understand them.

For example, you can display what happens if the strike price rises or falls by 5% within 3 months? With the help of the warrant calculator, the functioning or the performance of the warrant is simulated and thus leads to a better understanding.

The following warrant calculators are available:

  • Onvista
  • Consorsbank
  • Maxblue
  • sbroker
  • Deutsche Bank

When do warrants expire?

Warrants expire if the warrant no longer has any intrinsic value at the end of its term.

This is the case if the underlying asset performs differently than expected in advance.

Investors should be aware that the high gains are also associated with high risk. The risk/reward profile depends on various parameters, such as leverage and maturity. If the investor is wrong, these parameters can lead to a high loss and even a total loss. Often the payout amount is then only 0.001€.

How high is the risk with warrants?

The risk with warrants is very high and can lead to a total loss of the investment. If the warrant has no intrinsic value at the end of the term, it expires worthless.

Due to the often very high leverage, this also has an effect in the opposite direction. This means that the disproportionate profits are also offset by disproportionate losses. If the market rings in the opposite direction, this can mean a high loss. But other factors, such as duration and volatility also play a major role. If the underlying instrument only moves sideways but volatility decreases, the warrant loses value. This means that traders can lose money even if the underlying asset moves in the right direction. The influence of volatility should therefore not be underestimated and represents a further risk. In addition, there is the duration, which ensures that the warrant continuously loses value.

Therefore, the risk with warrants should not be underestimated and one should always be aware that a total loss is possible. In addition, one must also be aware of the other factors and know that the price of the warrant does not depend solely on the performance of the underlying asset.

In addition, there is the issuer risk.

What is the leverage?

Leverage is an important key figure when trading warrants. It indicates by how much more the warrant rises or falls compared to the underlying instrument. A leverage of ten would mean that if the underlying asset rises by one percent, the call warrant rises by ten percent. A put warrant would fall correspondingly by ten percent.

For a call warrant, the leverage can therefore be calculated as follows:

Leverage = price of the underlying asset / warrant price

As a result, warrants are very popular because they can be multiplied by a small capital investment. The high leverage is often very tempting, but you must always be aware that it works both ways.

The investor should therefore always be aware in advance of how much leverage the traded warrant has and what the effects of his investment will be.

What is the intrinsic value?

The intrinsic value of a warrant is the value that can be realised when the option right is exercised. It can also be said that the intrinsic value expresses the true value of a warrant.

The price of a warrant is made up of the intrinsic value and the time value.

For a call, the intrinsic value is calculated as follows:

  • Net asset value (call) = base quantity * (price of the underlying instrument – base price)

For a put, on the other hand, the calculation is as follows:

  • Net asset value (put) = reference quantity * (base price – price of the underlying)

If the current market value of the underlying asset is above the strike price, it is also known as in the money or in the money (in the case of a call).

In the money or at the money is the case when the strike price and the current market price of the underlying are identical. Here the warrant therefore has no intrinsic value.

But even if the warrant is out of the money or out of the money, it has no intrinsic value. This is the case if the current market price of the underlying asset is below the strike price during a call.

What is the time value?

Besides the intrinsic value, a
he time value also plays a role in the pricing of the warrant.

The time value is calculated as follows:

  • Time value = warrant price – intrinsic value

This is determined by the following factors:

  • Remaining term
  • Interest rate
  • actual price of the underlying instrument
  • Volatility of the underlying instrument
  • Dividend amount

The fair value decreases at maturity and is thus subject to a constant decline in value. The more the note approaches the end of its term, the more the fair value decreases. The probability of a positive performance of the underlying asset also decreases as the maturity date approaches. This is also directly reflected in the price of the warrant. Warrants with a shorter maturity for the same underlying instrument have a lower time value than those with a longer maturity.

At the end of the term, the warrant no longer has a time value and the price therefore consists only of the intrinsic value.

Therefore, in most cases it makes sense to sell the warrant before the end of the term, since the positive time value is lost when the warrant is exercised.

What strategies are there?

There are a variety of strategies for trading warrants.

The four best known are the following:

  • Call/Put naked
  • Straddle
  • Strangle
  • Bottom Fishing

One of the easiest strategies is to simply buy a call or put that is “close to the money”.

If you want to profit from rising prices, you buy a call with an exercise price that is slightly above the current strike price.

If you expect falling prices, a put is used, which has an exercise price that is slightly below the current strike price.

With a straddle, you bet on strong price fluctuations. Here, a call and a put on the same underlying asset with the same strike are acquired simultaneously.

For example, if the index stands at 10,000 points, the investor buys a call and put with a strike of 10,000. If the underlying asset moves strongly here, it can profit from the fluctuation. The direction is irrelevant here. If the expected price fluctuation does not occur, the positions will lose value.

If the underlying asset is quoted at 10,000 points on the expiration date, both the call and the put are worthless.

With a strangle, the trader also buys a call and put on the same underlying instrument. If the expectation is that prices will rise sooner, the put is set below the strike price of the call.

With an index level of 10,000 points, the trader buys a call with a strike of 10,000 points and a put with a strike of 9,500 points.

Due to the low buffer in one direction, the chances of price gains are somewhat higher compared to the straddle. However, the double option premium also applies here.

The trading of a possible trend reversal is tried with bottom fishing. This can be the case, for example, if an underlying asset has fallen for a long time and there are now signs of a reversal of the trend. Thus, one buys a call that is close to “at the money”. You are therefore trading against the current trend. Although this is riskier than trading with the trend, the price gains are also very high due to the high leverage, as long as you have the right timing.

In principle, however, this is also a call or put naked, since one is only speculating in one direction.

What advantages and opportunities do warrants bring?

Warrants have many advantages.

Firstly, these securities are also suitable for investors who have less capital. This is because the high leverage means that much less capital is required than for a direct investment in the underlying instrument.

Furthermore, the high leverage also allows for enormous profit opportunities. This is why these securities are so popular with speculative investors in particular.

A further advantage is that warrants can also be used to bet on or profit from falling prices. Therefore one has much more possibilities and is very flexible.

Due to the large number of issuers and the great competition, warrants are now available on all markets, so that almost any trading idea can be implemented with a warrant.

Warrants can be traded not only via the issuers but also via the Frankfurt and Stuttgart stock exchanges. This means that the range of trading venues is also large enough.

Where can warrants be bought?

Warrants can be traded on the stock exchanges or over the counter at the issuer’s premises. When trading on the stock exchange, fees and brokerage fees are incurred depending on the broker. If you trade directly via the issuer, there is no brokerage fee.

What is the premium on a warrant?

The premium is not, as might be assumed, a fee for a warrant, but rather a term for the “break-even point”. This key figure thus indicates the percentage by which the underlying value of the warrant must change in order to make a profit.

What is the delta for a warrant?

The delta on a warrant is one of the most important key figures and measures the change in the price of the warrant in relation to the price of the underlying asset by one monetary unit. The key figure thus measures the sensitivity between the warrant and the underlying instrument.

In the case of a call warrant, the delta thus indicates by how much the warrant increases in value if the underlying asset rises by one euro, for example. If the delta is 1, the warrant increases in value by one euro if the stock also increases in value by one euro.

However, the subscription ratio must also be taken into account. If it is 0.1, for example, the warrant would increase by 0.10 euro if the delta is one.

What are the “Greeks”?

The “Greeks” are key figures for pricing options.

In addition to the delta, there is also the gamma, vega and theta.

The gamma is also known as the delta of the delta. This key figure indicates the change in the delta when the underlying asset changes by one unit.

The vega measures the sensitivity between the price change of the warrant and the volatility. It thus indicates how the price of the warrant changes when the volatility changes.

The price of the warrant also increases as the fluctuation range increases. The term also plays a role. The shorter the term, the less the warrant reacts to a change in volatility.

The time value is expressed using the theta. The theta indicates how much a warrant loses per day. With a theta of -0.2, the warrant would lose 0.20 Euro the next day, even if the other parameters remained unchanged. The time value is therefore at its highest when the price of the underlying asset is close to the strike price.

The shorter the term, the faster the loss in fair value here.

For two warrants with the same strike price but different terms, the daily loss in value is therefore higher for the shorter warrant.

The Rho indicates by how much the price of the warrant changes if the interest rate changes by one percent. Thus, the sensitivity to a change in the interest rate level is shown here.

The key figures are therefore extremely important to understand in order to be able to track the price formation of the warrant. Thus the price of a warrant is not only dependent on the price of the underlying asset, which can also mean that a call warrant does not increase in value even though the underlying asset rises.

For this reason, a detailed examination of how the warrants work is essential before trading in warrants.

How can warrants be used to hedge a portfolio?

Warrants can be used to hedge your portfolio. There are various ways to do this. With put warrants you can protect yourself against falling prices, as the value of the warrant increases when prices fall, and can thus reduce or even compensate for the loss of your portfolio. Hedging the portfolio with put warrants is called “hedging” and is particularly popular with professional traders.

If you expect a falling market, you can still remain invested and simply hedge your portfolio with puts. You can also theoretically weight the puts higher and thus even make a profit despite the falling market. With few positions you can simply buy puts on the already existing positions. If the portfolio is larger, you can also buy puts on a special index etc. For example you could hedge your portfolio of DAX shares with a put on the Dax.

There is a formula to calculate the correct ratio. Although this is only for orientation, as the factors influencing the price are constantly changing, it should provide a good basis.

With a portfolio value of 100,000 and an index level of 10,000, as well as a delta of 0.6, 1,666 puts would be necessary to hedge the portfolio.

Are there taxes on warrants?

Since the introduction of the final withholding tax in 2009, current income and capital gains are taxed at the final withholding tax rate of 25%. In addition to the final withholding tax rate, there is a solidarity surcharge and, if applicable, church tax.

Realised losses can be offset in full and for an unlimited period against all other gains from capital assets, such as fund income, interest, dividends, price gains, etc.

The final withholding tax rate therefore applies to all leverage products.

What is an issuer?

The issuer is the issuer of the respective security. In the case of warrants, this is the banks. The issuers thus make the warrants public.

What issuers are there?

There are a large number of issuers on the German market.

The five largest issuers are the following:

  • Deka Bank
  • DZ Bank
  • LBBW
  • HypoVereinsbank
  • Deutsche Bank

Does the issuer risk also exist for warrants?

Since warrants are also leveraged products, they are also subject to issuer risk.

The investor bears the risk that the issuer may not be able to fulfil its obligations in relation to the product – e.g. in the event of insolvency (illiquidity/overindebtedness) or an official order for settlement measures.

In the event of a crisis of the Issuer, such an order of a settlement authority may also be issued prior to insolvency proceedings. In this case, the Winding-up Authority has extensive powers of intervention. Among other things, it may reduce investors’ rights to zero, terminate the product or convert it into shares of the Issuer and suspend investors’ rights.

With regard to the basic ranking of the issuer’s obligations in the event of measures taken by the settlement authority, investors are referred to www.bafin.de and are requested to search for the keyword “liability cascade”. A total loss of the investor’s invested capital is possible.

Warrants are a bond and as such are not subject to any deposit protection scheme.

What is the product information sheet?

The product information sheet or basic information sheet provides all the essential information on the respective product. In the case of warrants, this means all important details about the warrant. It contains all the information on a few pages, usually 2-3 pages.

However, this is not advertising material. Rather, these information sheets are required by law to help investors understand the nature, risk, costs, and potential gains and losses of this product. This also makes it easier for the investor to compare the knock-outs with other products.

If you are interested in how a product works in detail or if you are trading it for the first time, you should definitely read the product information sheet.

Also important here are the details regarding the underlying, maturity, expiration, etc. Only when you know all the details of the product can a trade be realistic. Many investors often overlook the small details, which can later be decisive for a profit or loss.

What is the difference between warrants and knock-out certificates?

The biggest difference between warrants and knock-out certificates is certainly that in the case of knock-outs, the influence of the implied volatility is either non-existent or minimal.

The price therefore moves relatively with the underlying asset. This enables simple and transparent price formation. The entire key figures, as known from warrants, are also eliminated.

Thus the focus here remains on the greater leverage that results from the lower capital outlay. Also, the leverage remains almost completely constant after the entry.

In addition, the investor “only” loses the financing costs in case of sideways movements. The high time value loss, which often occurs with warrants, is also eliminated.

But among all the advantages, one should not forget the disadvantage, which is to be found in the risk of loss, which is substantially larger with knock-outs, since during the entire term the barrier may not be hurt.

However, if this barrier is reached, the knock-out product expires worthless. Warrants can also expire worthless, but the possibility remains that they will regain “value” if the price of the underlying instrument subsequently moves in the opposite direction until maturity.

An example of a call warrant that has the following characteristics:

  • Call warrant
  • Share X as underlying
  • 100€ as underlying asset
  • A subscription ratio of 1:1
  • Subscription period: May 30, 2020
  • A premium of 10 €

With the purchase of the warrant, the buyer thus receives the right to purchase share X on 30 May 2020 at a price of €100. This right costs a premium of 10 €.

If the share is now quoted above the price of 100 € on 30 May 2020, the buyer can redeem his option and purchase the share at a price of 100 €. The buyer could then theoretically sell the share again at the current price and thus realize a profit. As a rule, however, a cash settlement is made here, so that the purchase of share X does not actually have to take place.

The issuer retains the premium of 10 € paid. This means that the share must first rise by the price of the premium until the buyer of the warrant can realize a profit after deduction of the premium. Thus, the holder of the warrant only makes a profit if the share exceeds the price of 110 €.

However, the premium also gives the holder the right not to purchase the share at the end of the term and thus only lose his premium of € 10.

What types of warrants are there?

There are many types of warrants and each issuer often has its own name.

Normal warrants are also known as plain vanilla warrants.

However, there are many other types of warrants in addition to the standard warrants.

For example, range warrants can be used to bet on sideways movements and thus also earn money when the market moves in a range. For every day that the underlying asset moves in the specified trading range, the investor receives a fixed amount of money.

Again, there are different ways of doing this. One possibility, for example, is that there is a daily credit if the underlying asset moves within the defined zone. On the other hand, if the underlying asset moves above or below the zone, the investor receives nothing.

Barrier warrants, which are often referred to as turbo warrants, have a fixed barrier. When the barrier is reached, the option right can either be activated (also known as a knock-in option) or expire (knock-out option). Again, there are different variants. In some cases, the investor suffers a total loss. Others, however, provide for repayment.

Quanto warrants are interesting if the underlying asset is quoted in a different currency than the underlying. With a quanto warrant, the currency influence is eliminated. The prices of quanto warrants are higher than those of standard warrants due to the currency hedging.

Hit warrants/digital warrants are a variant of the so-called digital warrants. These have only two payout options. Either zero or a fixed amount. In a call with the European option right, a fixed amount is paid out if the underlying asset exceeds the strike price on the exercise date. In the case of a note under the American option right, payment is made if the base price is reached at any time during the term of the option.

Power warrants are no longer offered so often. The squared positive difference between the base price and the current price of the underlying asset is paid out on the exercise date. The products have a maximum amount, so that the gains are limited here. If, in the case of a call, the underlying asset is quoted below the base price on the exercise date, the note expires worthless. Power warrants are mainly issued on indices and currencies.

Ladder warrants allow the holder to retain profits once they have been made. If the warrant reaches a previously defined price limit, the intrinsic value achieved up to that point is fixed. The base price is adjusted when the price limit is reached. The respective price limits are like a kind of ladder and so the investor can “shimmy” from price limit to price limit. The advantage is that the investor is protected against sudden price drops. Here too, the profit is usually limited (cap).

Conclusion of this article on warrants

Warrants are interesting products and offer enormous opportunities.

There is also a wide range of possible applications, which allow investors to implement almost any idea with the help of warrants.

However, these are complex products. Before trading in these, one should have a thorough understanding of how warrants work.

Every trader should also be aware that the enormous opportunities are also accompanied by considerable risks. For speculative investors, however, warrants are excellent instruments for obtaining the possibility of a very high profit. Also longer-term oriented investors should deal with warrants, as they can also be used to secure a portfolio.


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