Saturday 20 October 2007

The difference between options and warrants

Have you ever wonder what is the difference between options and warrants? They seem to be almost identical in some aspects. However, they are not truely similar.

Warrants are options to buy or sell shares that are listed on a stock exchange. The warrants themselves are listed on that stock exchange, rather than on the futures market.

The underlying asset of a warrant is always a share or a basket of shares, while the underlying product of an option could be anything from wheat to gold to shares.

Warrants are usually more accessible to the small investor, because the size of the contract, called the cover ratio, is smaller.

The cover ratio of an option or warrant is the number of options or warrants you need to buy one unit of the underlying asset. Warrants may, for example, only entitle you to buy a quarter or a half of a share, rather than one share or even 100 shares.

Warrants have no set time to maturity as this depends on the warrant issuer, but typically they are issued with an expiry date of four to 18 months. Options on the futures exchange usually have expiry terms – generally three months – that are set by the futures exchange.

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