**Warrants **are optional securities which give the right to buy or sell a financial asset (currencies, indices, rates, shares, etc.) under price and duration conditions defined in advance.

The **Call **warrant gives the right to **buy **at a fixed price until a given date

The **Put **warrant gives the right to **sell **at a fixed price until a given date.

The buyer of the warrant has a right to the support, called the** underlying asset**. If he decides to exercise his right, he can **buy (Call warrant)** or **sell (Put warrant)** the support at the exercise price, until maturity. This right is obtained for the price of the warrant.

A warrant is a negotiable product: the warrant buyer can leave it at any time by reselling it.

The buyer of a **Call option** has a right to buy the option, but he can leave the option without proceeding. The right to buy is not compulsory. Same thing goes for the right to sell a **Put option**, the buyer of a **Put option** has a right to buy the option, but it’s not compulsory.

As the contrary for the seller. The seller of a **Call option** or a **Put option** must proceed with the sale if the buyer wants to exercise its right to buy.

The price of a warrant is determined by the **Premium** made up of the time value and the intrinsic value. The **Premium** is equal to the intrinsic value plus the time value or P = TV + IV.

And remember, Options can be bought in multiples of 100 !

**For example :**

The Market price of a share is €87 on october 20th. You have the choice of purchasing a november **Call option** on these shares in three differnet ways as follows :

– Strike price : €86 with a premium of €4.50

– Strike price : €89 with a premium of €3.40

– Strike price : €93 with a premium of €3.20

You have a budget of €2000 and the broker’s fee is 3% of the purchase value.

What would be the best choice if the price at january 2021 option date exercise was as follow ?

– €88.00

– €94.00

– €98.00

The intrinsic value of a call warrant is equal to the difference between the price of the underlying asset and the exercise price. This value can be zero or positive, three cases arise:

If the **Call **is **in the money**, it means that in this case, the price of the **underlying asset** is higher than the **strike price**, ie the intrinsic value is **positive**. It means that the cost of the **strike price added to the premium** is inferior to the value of the **underlying asset**. So you make a profit and you exercise your **Call option**

If the** Call **is **out of the money**, it means that in this case, the price of the **underlying asset** is lower than the **strike price**, ie the intrinsic value is **zero**. So **strike price added to Premium **cost is superior to the value of the **underlying** **asset**. You lose money if you exercise your **Call option**, so you leave it, and you just lose the **Premium** you paid, it’s a loss.

If the **Call** is **at the money**, it means in this case that the price of the **underlying asset** is equal to the **strike price**, the intrinsic value is also **zero**. You lose the cost of the **Premium**.

In the last two cases, holding warrants at maturity is without interest because the intrinsic value is **zero **and therefore the value of the warrant is **zero**.

If the **Call **is between the **strike** **price **and the **break-even point**, traders would still exercise their **Call** to minimize the loss on the **Premium**, even for €2 or €3 if the broker’s fee is covered.

Same goes for the **Put option**

The intrinsic value of a put put is equal to the difference between the strike price and the price of the underlying. This value can be zero or positive, three cases arise :

– If the **Put **is** in the money**, it means in this case the price of the **underlying asset** is lower than the exercise price, ie the intrinsic value is **positive**.

– If the **Put **is **out of the money**, in this case the price of the **underlying asset** is higher than the **strike price**, ie the intrinsic value is **zero**.

– If the **Put **is **at the money** in this case the price of the **underlying asset** is equal to the **strike price**, the intrinsic value is **zero**.

In the last two cases, holding warrants at maturity is without interest because the intrinsic value is **zero **and therefore the value of the warrant is **zero**.

Let’s go back to our example :

01/2021 | 01/2021 | 01/2021 | ||||

€88 | €94 | €98 | ||||

Call Price | Option cost | Quantity | Cost | € | € | € |

€86 | €4.50 | 400 | € 1 854 | – 1054 | 1 346 | 2 946 |

€89 | €3.40 | 500 | € 1 751 | 0 | 749 | 2 749 |

€93 | €3.20 | 600 | € 1 978 | 0 | – 1 378 | 1022 |

At €88 in January 2021, you will make an intrinsic value of €2, so far so good. You have 400 options, you call them, so you expect a profit of 400*2= €800.. But the Premium costed you €1 854 ! So your loss is € 1 054 !

At €94 with a Call at €89 for 500 options, your expected profit is 500*5 = €2 500. but the Premium cost is € 1 751, so € 2 500 – € 1 751 = € 749, which is not bad at all considering the complexity of this market.

Of course, if the Call is €86 and you anticipate a underlying asset skyrocketing at €98, I urge you to expand your budget and buy 400 000 of them, which would make a profit of almost €3 millions. But quit dreaming..

Options are only allowed if you’re an experienced trader or if you have a minimum of $100,000 on your account. So, if you don’t have $100,000, your broker probably will not allow you to trade options and you have to tell them that you have some heavy experience.

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