My understanding on warrant
What is a warrant?
Warrant is a contract that gives you the right to buy/sell the actual company shares, at a certain price, before its expiry date. Warrant holder can exercise it to get actual company shares. Basically, warrant works like a lease on a company.
For example, Mr. A is feeling bullish on a stock and bought the call warrant. The call warrant's bought at a price $1, with the strike price at $10. In the case of exercising the warrant, Mr. A is actually spending $11 per share unit. In other words, if the stock price stay below $11, it is pointless to exercise it, and Mr. A incurred a total loss of $1.
Let's say, as time passes, the underlying stock move up to $15 today.
Mr. A can exercise the warrant, to buy the actual shares at $10 per share, and instantly profit $5 difference. Of course, minus the cost for the warrant (-$1), and any commission or fee for the trade. Safe to say Mr. A will profit at somewhere less than $4 per share.
Since warrant is not an actual company shares, holders are not entitled to any dividend payout. Why would anyone fancy such a contract over actual company shares?
Pros ![]()
- can trade with lower capital
- hedging downside by buying put warrant
- lock in price by buying call warrant
Cons ![]()
- high volatility due to gearing
- no dividend since not actual company shares
- has time limit / expiry date
- low liquidity compares to actual shares, generally speaking.
How it can fit into my trading plan?
If you are trading on the warrant (in&out) within a few weeks to a few months, and no plan to own the actual shares, then warrant can be useful. Especially its volatility will help in generating a great profit... or a great loss. This is assuming the warrant has enough liquidity, meaning has someone willing to buy from you.
If you plan to hold it for a longer term, then you will miss the opportunity for dividend. Plus, you will need to decide what to do before its expiry date, or risk the warrant expired and worthless.
Final thought ![]()
Personally, I think warrant is good for trading. Condition is the expiry date is far enough, and the liquidity is high enough to trade around. No exercise plan on the warrant... or my body![]()
Warrant costs premium, no dividend, even the lock-in price idea for DCA (dollar cost averaging) might not match my desired average price. For long term holding, I will still prefer direct purchase of stock. The idea of dividend is to have some compensation over time, knowing my money is going for long stay in that company.
Please like and feel free to share your thought/experience on warrant. Please let me know what to include next for better post. Thanks!
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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