Warrants

Warrants trading 

A warrant is a financial derivative that gives the holder the right but not the obligation to buy or sell an underlying instrument at a specific price before the expiry date. Warrants are issued by companies and provide a way to speculate on their shares. 

Traders may include warrants in their investing strategies as they provide an alternative way to conduct leveraged trading on Australian shares. They offer access to some of Australia’s leading companies' shares and a variety of other underlying instruments, such as indices, currencies, commodities and listed managed investments. Like options, warrants are listed and traded on the Australian Securities Exchange (ASX).  

Warrants derive their value from an underlying instrument, for example a company share. They give the holder the right to buy or sell the underlying instrument at a particular price from or to the warrant issuer. Alternatively, holders can be entitled to a dividend at a particular time. 

Types of warrants 

There are two types of warrants. 'Call' warrants refer to an arrangement to buy shares from the issuer, while 'put' warrants represent equity that can be sold back to the issuer. 

Warrants may take the form of investment warrants (longer-term investments) and trading warrants (generally short-term).

Benefits of warrant trading 

Leveraged trading – warrants can provide you with exposure to an underlying instrument for a fraction of the price.

Diversification – an important part of any investing strategy 

Portfolio protection - put warrants allow the buyer to protect the value of their portfolio against falls in the market or in particular shares 

Risks of warrant trading 

Leverage – small changes in the value of the underlying asset can result in larger changes in the value of the warrant 

Limited life – most warrants have a limited life and cannot be exercised after expiring. Unless the underlying share price is above the exercise price for call warrants (buy) or below the exercise price for put warrants (sell) upon expiry, the warrant will expire worthless 

Pricing variables – as warrant pricing is subject to variables like the price of the underlying instrument, time to expiry, interest rates and dividends, adverse changes could have a negative effect on the warrant 

Whilst there are no formal market maker obligations for warrants, market makers will generally provide a bid/offer for warrants during market hours. There may be periods where market makers are not active and this would generally occur in the period just after the market open. Additional care should be taken when placing warrants orders during these periods