Investing in options and warrants

What does investing in options (put option or call option) and investing in warrants (covered warrant or uncovered) entail? What are the options at the fair? An option or warrant on gold or silver, for example, can yield a lot of profit due to the leverage effect. With a warrant you have the right to buy or sell the underlying asset at the determined exercise price. Without obligation, as with an option. There are also differences and similarities between options and warrants. Investing with warrants and options offers new opportunities to achieve high returns on the stock market, especially for a swing trader who lives from option premiums, buying and selling .

Make a profit with options and warrants on the stock market

  • What are options for investment, the option premium, call or put option?
  • The listing of options on the stock exchange and the exercise price
  • What are investment warrants?
  • Differences between an option and warrant
  • Types of warrants
  • What are the risks of warrants?

What are options for investment, the option premium, call or put option?

You pay an option premium for the right to exercise an option. There are two types of options in which you can invest:

  • The call option gives the owner of the option the right to buy the underlying asset. The underlying asset can be anything, including gold.
  • The put option gives the owner the right to buy the underlying asset.

A right is always matched by a duty. This means that if someone wants to exercise his right to buy or sell, there is always an option holder who is obliged to deliver or purchase.

The listing of options on the stock exchange and the exercise price

Pay close attention to complicated abbreviations. For example, UN, C, 20220916, 4:00 PM means that you have a Unilever call option that expires at 4:00 PM on September 16, 2021. Until this date, you have the right to buy 100 Unilever shares at the stated price of the option. The exercise price is the price you have to pay if you actually exercise your right (purchase, sale). Always pay attention to the expiration date, the moment an option expires. Sometimes it is worth choosing to roll over to avoid making a loss when exercising the option.

What are investment warrants?

The owner of a warrant has purchased the right to buy or sell the pieces, the underlying asset. Just like with options, the underlying value can be anything. Think of shares, basket of shares, bonds or foreign currency. The price at which this is possible is determined in advance. The price on the stock exchange of a warrant is at least equal to the intrinsic value of the warrant. An additional premium is added that depends on the term of the warrant and the mobility or volatility of the underlying asset. Please note that the buyer of a warrant is not obliged to do anything. However, the term of the warrant is important, because once the term has expired, the right to exercise the warrant also expires. However, the term of a new warrant is usually longer than that of a newly issued option. There is another important difference between options and warrants: a warrant is issued by a financial institution, while an option is issued by the stock exchange.

Differences between an option and warrant

The main differences between warrants and options are:

  • The warrant does not oblige you to do anything but is a right.
  • The term of the warrant is usually longer than an option.
  • Options are issued via the stock exchange and warrants via, for example, a bank.
  • A warrant is much more customized than the standardized options. The warrant is filled by the bank as needed.
  • Warrants come onto the market in a limited quantity per series, while an unlimited number of contracts can be concluded in each option series.
  • Options are only traded on the options exchange, while warrants can be purchased on the stock exchange.
  • Unlike options, trading in warrants does not require signing an agreement because they are not issued by the stock exchange but by banks.

Types of warrants

We distinguish the following warrants:

1. The covered warrant

With the covered warrant, the issuing party ensures that the obligations upon exercise of the warrant can be met at any time. Fully covered warrants are the most classic of the warrants.

2. The unsecured warrant

The uncovered warrants are issued to enable a capital increase upon exercise. It is not possible to increase the equity capital if exercising the warrant is no longer advantageous and therefore nothing takes place.

3. The call warrant

The call warrant increases in value if the underlying asset also increases in value. With the call warrant you go long. You then make a profit when prices rise. The call warrant gives you the right to purchase the underlying asset.

4. The put warrant

The put warrant rises in value if the underlying asset falls: you go short. The put warrant gives you the right to sell the underlying asset.

What are the risks of warrants?

Warrants are mainly intended for the more experienced investor. The value of the term changes if the term, interest rate and underlying value change. You also have to deal with a leverage effect: you pay much less for a warrant than if you were to invest directly in the underlying asset. Experienced investors use warrants not only to make money with the warrants themselves, but also to hedge risks. The big advantage of a warrant is that you cannot lose more than the amount you invested. The warrant is also a simple way to gain access to all kinds of investments in the world that are otherwise difficult to reach.

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