Warrant is a right but not an obligation to buy or sell a certain underlying assets (stock, index, currency, or commodity), at a pre-determined Price (called the Strike price or Exercise price), on or before a pre-determined Expiry Date.
There are 2 different
types of warrants
commonly called
company warrants &
covered warrants
A company warrant (equity warrant)is a funding exercise for the corporation that issues call warrants over its own stocks. On exercising, the company will issue new shares and deliver them to the exercising warrantholders against payment of the exercise price.


A covered warrantis usually issued by an investment bank. The bank does not issue a warrant as a funding exercise but in order to provide investors with an efficient tool to manage their investment portfolio. The covered warrant is a listed security, traded on an exchange and constitutes a contract between the issuer and buyers of the warrant. The obligations of the issuer are materialised by the listing documents that detail all terms and conditions of the issue.
Warrants come in two
different forms
A call warrant provides the warrantholder with a right, but not an obligation, to buy the underlying asset at a pre-determined price (strike price), within a certain time period. A put warrant provides the warrantholder with a right, but not an obligation, to sell the underlying asset at a pre-determined price (strike price), within a certain time period.
Warrants are either
European or
American style
A European style warrant allows the warrantholder to exercise his right only on the expiry date. Most Hong Kong listed warrants are European style. An American style warrantallows the warrantholder to exercise his right at any time between the listing date and expiry date.
Here, we will focus on European Style Covered Warrants as they are the pre-dominant type of warrants traded in Hong Kong.

However, whichever style, European or American, the warrant can be sold at anytime before maturity in the market. In practice, warrantholders very rarely exercise the warrant. Most warrantholders sell the warrant before maturity.
Call warrants

Call warrants give you the right to buy a given amount of the underlying asset at a predetermined exercise price within a certain period.

Suppose you buy a call warrant at $2, with stock A as the underlying asset and an exercise price of $40. If the price of stock A is above $42 (the breakeven point) on the expiry date, you can make a potential profit as illustrated in the following diagram. The higher the stock price, the higher your return. However, if the stock price lies between $40 and $42, you can still exercise the warrant, but at a loss after deducting the warrant price. If the stock price is at or below $40 (i.e. out-of-the-money), it will not be worthwhile to exercise your warrant. In such a case, your initial outlay in the warrant is entirely lost!
Payoff Diagram of a Call Warrant

Put warrants

Put warrants give you the right to sell a given amount of the underlying asset at a predetermined exercise price within a certain period.

Suppose you buy a put warrant at $1, with underlying stock B and exercise price of $30. If the price of stock B is below $29 (the breakeven point) on the expiry date, you can make a potential profit as illustrated on the following diagram. The lower the stock price, the higher your return. But, if the stock price lies between $29 and $30, you can still exercise the warrant, but at a loss after deducting the warrant price. If the stock price is at or above $30, you will not exercise the out-of-the-money warrant and face a loss equal to its purchase price!
Payoff Diagram of a Put Warrant

Remember, even though the potential gain of buying a warrant can be substantial, your warrant can become worthless if on the expiry day, it is out-of-the-money and is not worth exercising.