This is what the cop is doing while he or she is sitting in their car after pulling you over for speeding. If you have a warrant, get ready for handcuffs. It's also a term related to certain provisions included in bond and preferred stock offerings.
Call warrants give the holder the right, but not the obligation, to buy a certain number of shares of common stock at a specific price and by a specific date. Also known as just a warrant, companies offer call warrants directly to investors or they might just hand them out to employees. But most of the time call warrants are attached to bonds or to preferred stock offerings. Unlike employee stock options that are granted at a price lower than the current market price, the exercise price of a call warrant is usually about 15% higher than the current market price.
What also sets them apart from other securities (or options) is that they can be detached from the bond or preferred stock, so one can sell the warrant and keep the bond, or vice versa. They also have a longer period before they expire (5+ years) than a regular call option, for example. While investors can take advantage of any price increases over that time period, the issuing company also wins, since they will now receive an infusion of capital from the sale of the common stock, which will help reduce the cost of the debt owed on the bonds.
So let's say Warrant We Great Inc. wants to issue a bond with a call warrant attached in order to attract more investors to the bond offering (otherwise known as sweetening the pot). They issue $50 million worth of bonds, each with a face value of $1,500, with a callable warrant attached. That warrant gives the buyer the right (but not the obligation) to purchase 200 shares of Warrant We Great at $30 a share over the next six years. The $30 price is above the current market price by about 15% but it has six years to go up.
Related or Semi-related Video
Finance: What Is a Put Option?83 Views
finance a la shmoop what is a put option? hot potato hot potato
ow ow! yeah remember that game well nobody wanted the potato, poor thing. the
players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]
of work the same way. a put option is the right or option or choice to sell a
stock or a bond at a given price to someone by a certain end date.
all right example time. you bought netflix stock at the IPO a zillion years
ago at $1 a share. that's you know splits adjusted. all right now it's a hundred
bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in
California that would be a tax of something like almost 40 bucks. well the
stock was a hundred but you keep only something like 60. feels totally unfair.
right so you really don't want to sell your stock but you're nervous about the [graph shown]
next few months that Netflix will crater for a while and go down ten
maybe twenty dollars. longer term though you think it'll hit 300. so this is the
perfect setup to maybe look at buying some put options on Netflix. if the stock
goes down your put options go up. with Netflix volatile but at a hundred bucks
a share ,you look up the price of an $80 strike price put option expiring in
December, and you know that's mid-september now .for five bucks a share
you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]
term life insurance. you pay the five dollars a share in the stock goes down
to 82 by mid December, worst of all worlds. well not only did you lose the $5
a share but your stock has lost $18 in value. but had Netflix really cratered
and gone to say $60 a share well you would have exercised your put and sold
your shares at 80 bucks. well those put options you paid $5 for
would be been worth 15 bucks a share. in buying that put option you've [equation shown]
guaranteed that your loss will be no more than a $75 value for your Netflix
position at least for that time period and ignoring taxes. well remember that
options expire after December whatever like the third Friday of the month it's
usually when options expire, you then have no protection and your shares float
along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]
raunchy. yeah well that's naked put options.
that's what they really are people.
Up Next
What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...
What is a strike price? Strike prices are used in conjunction with options. Calls and puts give investors the right to buy or sell stocks at predet...