Let’s summarize the main differences between
options and
warrants, and so we will see the features of each tool.
Options are contracts between two parties. One part is the person or institution that owns or wants to acquire those shares and the other part is who want to buy or sell such shares at a specified price (Strike Price).
When we operate with options, our broker will go to the Stock Exchange Market to find and generate the contract counterparty, which will be managed by the OCC (Options Clearing Corporation).
By contrast, the Warrants are contracts between investors and the bank or financial institution that issued those warrants on behalf of the company that owns the shares in which the warrants are based.
If you operate with warrants, that financial institution will be your counterparty, both for purchase and for sale. Moreover, this institution will act as
Market Maker.
Companies issue warrants to stimulate the sale of shares and hedge against a decline in the value of the company due to a fall on the stock price. So when you buy a warrant are helping to the company who is issuing the warrants, whether the execution occurs or not.
However, in a transaction with Options, the Company does not receive a direct benefit for the transaction. It is the investor or trader who gets the benefits.
Options are standardized in terms of strike price and
expiration month, ie, we all play with the same rules, while the warrants vary according to business needs.
The options can be American style (you can
exercise them at any time) or European (exercise only at expiration), while the Warrants are only European style. This makes the
extrinsic value of American-style options higher, which translates into strategies of credit (credit trades) with greater capacity to benefit.
Another advantage of the options is that they can be sold (Sell to Open), while the warrants can only be bought. This means we can not implement strategies when our expectation is
bearish movement if we use Warrants.
In summary, the Options are much more flexible, more versatile and better for Spreads and Trading Strategies.
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