# Warrant Premium: Meaning, Calculation, Example

## What Is a Warrant Premium?

A warrant premium is the difference between the current traded price of a [warrant](https://www.investopedia.com/terms/w/warrant.asp) and its minimum value. A warrant's minimum value is the difference between its [exercise price](https://www.investopedia.com/terms/e/exerciseprice.asp) and the current traded price of its underlying stock.

Alternatively, a warrant premium is the percentage difference between the cost of purchasing shares by exercising a warrant and buying them in the [open market](https://www.investopedia.com/terms/o/open-market.asp) at the current price.

### Key Takeaways

*   A warrant premium represents the additional value of a warrant above its stated minimum, which can be estimated as the difference between its strike price and the market price of the underlying.
*   It can also refer to the premium given to exercising a warrant over buying shares in the open market.
*   A warrant is a type of call option granted by companies that gives employees or managers the right to purchase company shares in the future at favorable terms.

![A stockbroker standing on the floor of a stock exchange looking at the current securities prices posted on a digital board.](https://www.investopedia.com/thmb/W01yDHzGDrLBCc-bVSiTv6GZpqE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/WarrantPremium-379e8096711e4a68b2385a9b72aa163c.jpg)

*— Rizwan Tabassum / Getty Images*

## Understanding a Warrant Premium

Warrants have both a price and a [premium](https://www.investopedia.com/terms/p/premium.asp). Typically, the premium will decrease as the price of the warrant rises coupled with the decrease in the time to expiration. A warrant is [in-the-money](https://www.investopedia.com/terms/i/inthemoney.asp) (ITM) when the exercise price is less than the current share price. The more in-the-money the warrant is, the lower the warrant premium. High volatility may also cause the warrant premium to be higher.

As with [call options](https://www.investopedia.com/terms/c/calloption.asp), the premium can increase or decrease depending on supply and demand factors.

## Calculating the Warrant Premium

For the simple definition, the premium is the amount above the [intrinsic](https://www.investopedia.com/terms/i/intrinsicvalue.asp), or minimum value.

*   Premium = current price of the warrant - minimum value
*   Minimum value = exercise price - current price of the underlying stock

## Example of Warrant Premium

In this example, if the warrant price is $10, the exercise price is $25, and the current share price is $30, then the warrant premium would be $10-( $30-$25) = $5.

For the second calculation, the premium, expressed as a percentage, is the difference between buying warrant shares vs. buying shares through the open market.

*   Premium = \[(Warrant Price+Exercise Price-Current Share Price) / Current Share Price\] \* 100

For example, an investor holds a warrant with a price of $10 and an exercise price of $25. The current share price is $30. The warrant premium would be \[( $10+$25-$30) / $30\] \* 100 = 16.7%.

Warrants tend to trade at premiums because [traders](https://www.investopedia.com/terms/t/trader.asp) believe that the underlying stock can increase in price. Therefore, the longer the time until expiration, the longer the stock has to rise. However, as with [options](https://www.investopedia.com/terms/o/option.asp), as expiration approaches, the premium shrinks.

## Difference Between Options and Warrants

A warrant is [similar to a call option](https://www.investopedia.com/articles/investing/071513/warrants-and-call-options.asp). It gives the owner the right, but not the obligation, to buy an [underlying security](https://www.investopedia.com/terms/u/underlying-security.asp) at a specific price, quantity, and at a future time. Warrants are unlike an option in that it is issued by a company, whereas an option is an instrument of the stock exchange. The security represented in a warrant, usually share [equity](https://www.investopedia.com/terms/e/equity.asp), is delivered by the issuing company instead of by an investor holding the shares. Traders cannot write warrants.

Companies will often include warrants as part of a [new-issue offering](https://www.investopedia.com/terms/n/newissue.asp) to entice investors into buying the new security.

> **Fast Fact**
>
> While most listed options have a maximum expiration term of one to three years, warrants may have expiries of up to 15 years or more.

## How Do Warrants Differ From Company Stock?

Warrants are sometimes given by companies to their employees as a form of equity compensation known as [employee stock options](https://www.investopedia.com/terms/e/eso.asp) (ESO). Because they are options contracts, they do not pay dividends nor have any voting rights. The warrants, however, may be exercised and converted into shares.

## What Is a Warrant Sweetener?

Sometimes a company will [attach warrants to other securities](https://www.investopedia.com/terms/w/warrantcoverage.asp) that it issues in order to raise capital, making the issue more attractive to investors. For example, a warrant may be attached ("wedded") to corporate bonds or preferred shares. This is known as a "[sweetener](https://www.investopedia.com/terms/s/sweetener.asp)."

## How Can Warrants Dilute Earnings Per Share (EPS)?

Earnings per share (EPS) is a key metric followed by investors and analysts. It is computed as a company's net income for a certain period divided by the number of shares outstanding. Warrants, however, can have a dilutive effect in that these contracts represent _potential_ new shares that are not yet available. Therefore, [fully-diluted EPS](https://www.investopedia.com/ask/answers/061715/whats-difference-between-basic-shares-and-fully-diluted-shares.asp) is often preferred, which takes into account all potential new shares that could be brought about through warrants, other employee stock compensation, and convertible securities.

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