Warrants and options seem to be the same, but in reality they are different in certain aspects.

To begin with, their trading mechanisms vary. Investor can long (buy) or short (write, or sell) an option. For example, if you are optimistic about the underlying, you can buy a call option or write a put option. In contrast, if you are bearish, you can buy a put option or write a call option.

In the case of warrants, the investor can only be a buyer, and choose between call warrants or put warrants. The seller is always the issuer.

Besides, the extent of loss also differs. If an investor is bullish about the underlying and wants to buy a call option, he needs to pay a premium up front. In case the underlying price does rise above the strike price, the investor can exercise the option to earn the difference. This is similar to the way call warrants work. However, the investor can also choose to write a put option. In this case, he will receive a premium. If the underlying price climbs above the strike price, the put option will become worthless (and not exercised), leaving the premium safe in the hands of the investor. Yet, in writing a put option, the investor is required to deposit a margin and face the risk of unlimited loss (in theory, the underlying price can drop to zero).

If you are negative about the underlying, you can choose to buy a put option. The way it works is similar to put warrants. Yet, again, you can also write a call option. If the underlying price falls below the strike price, you will pocket the full amount of the premium. Otherwise, if the underlying price is higher than the strike price, you will face the risk of unlimited loss (in theory, the underlying price can go up indefinitely). Hence, while options offer more possibilities, the risk is also much bigger. In contrast, warrants are only subject to limited risk exposure.

SG Securities (HK) Ltd provided the article.

(HK Edition 08/04/2008 page1)