# Understanding Derivative Warrants: Types, Examples, and How They Work

## What Is a Warrant?

Warrants are a derivative that give the right, but not the obligation, to buy or sell a security—most commonly an equity—at a certain price before expiration. The price at which the underlying security can be bought or sold is referred to as the exercise price or strike price. An American [warrant](https://www.investopedia.com/trading/warrants-risky-but-high-return-investment-tool/) can be exercised at any time on or before the expiration date, while European warrants can only be exercised on the expiration date. Warrants that give the right to buy a security are known as call warrants; those that give the right to sell a security are known as put warrants. 

### Key Takeaways

*   Warrants are financial derivatives giving the holder the right, but not the obligation, to buy or sell a security at a predetermined price before a specific expiration date.[  
    ](https://www.investopedia.com/terms/n/naked-warrant.asp)
*   Unlike options, warrants are commonly issued by the company itself and can result in dilutive effects due to the issuance of new stock upon exercise.[  
    ](https://www.investopedia.com/terms/n/naked-warrant.asp)
*   Warrants often trade over-the-counter and are known for having longer expiration periods compared to options, but they do not carry voting rights or dividends.[  
    ](https://www.investopedia.com/terms/n/naked-warrant.asp)
*   Different types of warrants include traditional, naked, wedded, and covered, each with distinct features based on how they're issued and exercised.[  
    ](https://www.investopedia.com/terms/n/naked-warrant.asp)
*   Selling or finding information on warrants can be challenging due to their less frequent listing on major exchanges compared to traditional securities.

## Understanding the Mechanics of Warrants

While warrants and options are similar, they have [key differences](https://www.investopedia.com/ask/answers/08/stock-option-warrant.asp). Companies typically issue warrants, which are often traded over-the-counter rather than on exchanges. Investors cannot write warrants like they can options.

Unlike options, warrants are dilutive. When investors exercise a warrant, they get newly issued stock instead of existing shares. Warrants tend to have much longer periods between issue and expiration than options, of years rather than months.

Warrants do not pay dividends or come with voting rights. Investors like warrants for leverage, hedging against risk, or taking advantage of arbitrage opportunities.

> **Important**
>
> Warrants are no longer common in the United States but are heavily traded in Hong Kong, Germany, and other countries. 

## Exploring Different Types of Warrants

Traditional warrants are issued in conjunction with bonds, which in turn are called warrant-linked bonds, as a sweetener that allows the issuer to offer a lower [coupon rate](https://www.investopedia.com/terms/c/coupon-rate.asp). These warrants are often detachable, allowing them to be sold separately from the bond before expiration. A detachable warrant can also be issued in conjunction with preferred stock.

Wedded or wedding warrants are not detachable, and the investor must surrender the bond or preferred stock the warrant is "wedded" to in order to exercise it. 

Financial institutions can issue covered warrants, which don't result in new stock when exercised. Rather, the warrants are "covered" in that the issuing institution already owns the underlying shares or can somehow acquire them. The underlying securities are not limited to equity, as with other types of warrants, but may be currencies, commodities, or any number of other financial instruments. 

## Tips for Locating and Trading Derivative Warrants

Trading warrants and finding their information can be challenging since most aren't listed on [major exchanges](https://www.investopedia.com/ask/answers/08/security-market-usa.asp) and free data is scarce.

When a warrant is listed on an exchange, its ticker symbol will often be the symbol of the company's common stock with a W added to the end. For example, Abeona Therapeutics Inc's ([ABEO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=abeo)) warrants were listed on Nasdaq under the symbol ABEOW. In other cases, a Z will be added, or a letter denoting the specific issue (A, B, C…).

Warrants generally trade at a premium, which is subject to [time decay](https://www.investopedia.com/search?q=time+decay) as the expiration date nears. As with options, warrants can be priced using the [Black Scholes model](https://www.investopedia.com/terms/b/blackscholes.asp). 

## How do derivative warrants differ from options?

Both derivative warrants and options give the holder the right to buy or sell shares at a set price before a specified date. However, options are listed on an exchange and traded from investor to investor while derivative warrants are issued by the company itself.

## What does it mean for a derivative warrant to be dilutive?

A derivative warrant is dilutive because it dilutes or reduces each other shareholder's ownership in the issuing company. If you hold a warrant allowing you to buy 1 share in a company that currently has 10 shares outstanding and you exercise it, the number of shares outstanding will increase to 11. You'll gain ownership while each other shareholder will lose a percentage of their stake in the company.

## What happens if a derivative warrant expires?

If a warrant expires without being exercised, it becomes worthless. The holder of that warrant can no longer use it to buy shares in the issuing company.

## Why buy derivative warrants over options?

Derivative warrants have some advantages over options. For example, they have much longer expiration timelines and are often attached to otherwise already valuable securities, such as bonds.

## Final Thoughts on Derivative Warrants

Derivative warrants provide investors with the opportunity to buy or sell securities at a predetermined price before expiration, similar to options. They are issued by companies rather than traded between investors like options and tend to have longer expiration periods. Although not widely traded, they are popular in markets such as Hong Kong and Germany.

While derivative warrants can be leveraged for potential arbitrage opportunities and hedging strategies, they come with challenges including complexity, limited availability, and high trading costs. Investors should recognize that warrants can be dilutive, meaning they can reduce other shareholders' ownership stakes when exercised. Understanding the differences between traditional, naked, wedded, and covered warrants can further aid in leveraging these instruments effectively.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Abeona Therapeutics Inc. Prospectus](https://investors.abeonatherapeutics.com/all-sec-filings/content/0001144204-16-123447/v448461_posam.htm?TB_iframe=true&height=auto&width=auto&preload=false)," Page 5. Accessed Aug. 8, 2021.