Most stock warrants are similar tocalloptions in that they providethe holder the right, but not the obligation, to buy shares of a company at a specified price (strike price) before the warrant expires. Unlike a listed option, a warrant is issued by acompany instead of an option writer.
Key Takeaways
- A stock warrant is issued by an employer that gives the holder the right to buy company shares at a certain price before the expiration.
- The easiest way to exercise a warrant is through yourbroker.
- When a warrant is exercised, the company issues new shares, increasing the total number of shares outstanding, which has a dilutive effect.
- Warrants can be bought and sold on the secondary market up until expiry.
- If the current stock price is below the strike price, the warrant may still have some time value and can still have value in the market.
How to Sell or Exercise a Warrant
A warrant holder may choose to exercise the warrant if the current stock price is above the strike price of the warrant. Alternatively, the warrant holder could sell their warrants, as warrants can be traded similar to options.
If the current stock price is below the strike price, it makes little sense to exercise the option, since it is cheaper to buy the stock on the stock market. For example, if the strike of the warrant is $40, and the stock is currently trading at $30, it is not prudent to exercise the right to buy the stock at $40 when it can be purchased at $30.
On the other hand, if the stock is trading at $50, and the strike of the warrant is $40, it is beneficial to exercise the warrant. That said, just because the current stock price is above the strike price doesn't mean the warrant has to be exercised. If there is still lots of time until the warrant expires, holding onto the warrants may prove even more profitable.
For example, if over the next year the stock rises to $80, the warrant has become more valuable. The stock is trading at $80 and the warrant holder has the right to buy at $40 (and could immediately sell those shares for $80).
Use Your Broker
The easiest way to exercise a warrant is through yourbroker. Theywill handle much of the paperwork and correspondence with the company that issued the warrant to you. Warrants show up in your trading account just like a stock oroption. Contact your broker and tell them you would like to exercise the warrants in your account.
Stipulate how many, out of the total number you hold, you would like to exercise. Once the broker has contacted the issuing company, the exercised warrants will disappear from the account and the stock will appear. Your broker will likely charge a fee for this service.
Exercising warrants is dilutive to existing shareholders. When a warrant is exercised the company issues new shares, increasing the total number of shares outstanding.
Special Considerations
The warrantcould be based on any ratio chosen by the company. It may require five warrants for one share, or 10, or 20. When selling or exercising an option, make sure you are aware of all the stipulations of the warrant so you end with the number of shares (and exercise the number of warrants) you want.
Warrants are not necessarily one warrant for one share.
Another alternative a warrant holder has is to sell the warrants. Warrants can be bought and sold up until expiry. If a stock is trading at $50, and the strike of the warrant is $40, the warrant should trade for at least $10 (assuming one warrant equals one share). This is because someone could buy the stock at $40 with the warrant and sell it immediately for $50...a $10 profit per share. Likely, though, the warrant will trade for more than $10.
This is because there is also time valueadded to the cost of the warrant. If there is a year left before expiration, the person selling the warrant will want to sell it for more than $10, since there is a chance the stock price could move up within that time, making the warrant worth more. Therefore, the warrantcould actually be sold for potentially $12, instead of $10, as an example.
The Bottom Line
Even if the current stock price is below the strike price, the warrant may still have some time value and can, therefore, be sold for something. If the trader opts to sell the option instead of exercising it, sell the warrant within your trading account how you would any other stock or option. Set the priceto sell it at, the quantity, along with any other order parameters you want.
