A warrant is a financial instrument that will pay out an amount of cash (or underlying) at a specified date in the future if the underlying on which it is based (most often a share or an index) is above (in the case of calls) or below (in the case of puts) a predetermined price (that is known as the strike or exercise price).
Warrant Terminology Before entering a warrant trade it is important to understand the specific terms and conditions of the warrant. These are set before a warrant is issued and can only change as the result of a corporate action (such as a share split).
Basics of call and put warrants Standard Bank Warrants provide a simple, low cost way to gain exposure to shares listed on the JSE. The two basic types of warrants are “call warrants” and “put warrants”. Call warrants allow investors to profit from share price rises. Put warrants allow investors to profit from share price falls.
Strike (Exercise) Price The strike price is the level that the underlying security (e.g. Anglo American PLC) needs to be above (for calls) and below for puts in order for the warrant to have a positive value at expiry. This price is set at the outset by the issuer and cannot change (except in the case of a corporate event e.g. a share split).
Call warrants A call warrant gives the holder the right, but not the obligation, to buy the underlying share for a fixed price known as the “exercise price” at a future date. Taking up this right is known as “exercising the warrant”. However, call warrants can be traded without the need to exercise the underlying share, thereby making them ideal for short term trading.
Put warrants A put warrant gives the holder the right, but not the obligation, to sell the underlying share to the warrant issuer for the exercise price at a future date (also referred to as exercising the warrant).
Expiry date Both call and put warrants have an “expiry date”. An “American-style” warrant can be exercised at any time up to and including the expiry date. A “European-style” warrant can be exercised only on the expiry date. The terms of issue of a particular warrant will specify the style of exercise.
Conversion Ratio The number of warrants you need to hold, in order for you to exercise into one underlying share