A warrant is a tradable security issued by an institution for a time period that gives the right (and not the obligation) by paying a price to buy (call warrant) or to sell (put warrant) a specific amount of an asset (underlying asset) at a specified price (strike) over the duration of its life or on its expiry date depending on its style.
Warrant features
- Time period: This refers to the warrant’s expiry date, which indicates the date from when the warrant no longer exists. The expiry date may or may not coincide with the warrant’s last trading day in the Stock Exchange Interconnection System.
- Warrant price: This is the premium, that is to say, the effective price on what trades are executed on the Stock Exchange Interconnection System. The premium will be closely tied to the price evolution of the underlying asset related to the warrant.
- Call warrant: This is a purchase warrant, that is to say, it gives the right to buy the underlying asset.
- Put warrant: This is a sales warrant, which gives the right to sell the underlying asset.
- Ratio: This is the number of underlying asset units that a warrant gives the right to buy (call) /sell (put).
- Strike: is the price set by the issuer of the warrant that allows the holder to buy (in the case of a call warrant) or sell (in the case of a put warrant) the underlying asset at the time of exercising the warrant.
- Exercise of the warrant: is the act by which the holder of the warrant exercises the right to which it is entitled by relinquishing ownership of the warrant in exchange for the purchase (in the case of a warrant call) or sale (in the case of a warrant put) of the underlying asset.
- Style: A warrant can be American-style or European-style. If the warrant is American, it may be exercised during the warrant’s life. On the other hand, if it is European, it can only be carried out on the warrant’s exercise date.
Advantages of investing in Warrants
- Traded on Spanish stock market in real time and continuously from 9 am to 5 pm.
- Offer access to a large variety of assets: equities, commodities, currencies, etc.
- Market maker's commitment to provide liquidity, offering buy and sell positions during each trading session.
- Trading transparency as products are subject to strict oversight rules by the stock exchange governing body, Sociedad de Bolsas.
- Can be used to implement different investment strategies.
Warrants Product Types
Turbos may have early termination in relation to the expiry date established in the issue conditions. The early termination possibility is determined by a barrier level. When the underlying asset price reaches or exceeds the barrier level, the Turbo is terminated early (knocked-out).
In the case of Turbo Call, early termination is produced if the Underlying Asset level is “less than or equal to” the barrier established in the issue conditions.
In the case of Turbo Put, early termination is produced if the Underlying Asset level is “more than or equal to” the barrier established in the issue conditions.
When the aforementioned conditions are met, Turbos terminate early without any value and are delisted.
Taking the aforementioned into account, Turbos are characterized by high leverage that is reflected in the premium level (or Turbo price). Similarly, its price evolution is mainly determined by the underlying asset price evolution and not so much by its volatility or expiry term.
Within this same product category, we also find the so-called ‘Turbo Pro’. These incorporate two thresholds (knock-in barriers) that form an activation price range. Therefore, Turbo Pros will remain inactive in the market until the level of the underlying asset trades within the mentioned range. Once activated, Turbo Pros act as any other Turbo.
Bonus offer the performance of its underlying asset and, as long as the level of the latter does not reach a determined lower barrier during the lifecycle of the product, the issuer guarantees a minimum selling price or ‘bonus’. Therefore, if the level of the underlying asset reaches this lower barrier, then the Bonus loses its ‘bonus’ guarantee but remains active on the market.
Within this same product category, we also find the so-called ‘Bonus Cap’. These incorporate a limit to the potential upside performance of the product that is placed at the same level of the ‘bonus’ guarantee, whether it is still active or not at its expiry date.
This type of product grants the right to receive a fixed amount of money on the expiry date, assuming that the value of the underlying asset is still within the limits or the established barriers.
Inlines have both an upper and lower barrier, between which the underlying asset’s price must stay. If the underlying asset’s price touches either of the barriers, the inline will expire automatically without value.
The Discounts are investment products, with the characteristic of offering a maximum return calculated from the difference between the upper and lower barriers. They can be either bullish, Call Discount, or bearish, Put Discount.
The Call Discounts offer a maximum yield when the level of the underlying asset is equal or higher than the upper barrier on the maturity date, or whenever it has remained above the lower barrier during the entire life of the product. If it breaches the lower level the product will remain active in the market but it will no longer deliver the maximum yield unless the first previously described circumstance occurs. If at maturity the underlying asset is below the lower barrier, the Discount would be worth 0.
The Put Discount has a similar behaviour but in reverse.
Stay-High and Stay-Low warrants are listed products that entitle the holder to a fixed settlement on maturity, provided the underlying asset does not reach the barrier set for the product.
The barrier can be set above or below a price depending on whether it is expected that the price of the underlying asset will remain below or above a barrier during the life of the product.
Certificates entitle their holders to receive from the issuer on the settlement date a determined amount on the certificate nominal value in accordance with the underlying asset performance.
The final return of certificates depends on the investment strategy and performance of the underlying asset.
Multi Warrants are suitable for investors who have a specific expectation regarding the price evolution of an underlying asset in the short term. Investors can use this product to take advantage of price movements in a day, as well as to follow short-term trends with a constant leverage. Multi Warrants offer the possibility of participating in price increases (long strategy) as well as in the decrease in prices (short strategy) of the underlying. However, investors should keep in mind that leverage works in both directions and that a total financial loss can occur.
The expiration of the Multi Warrants is not limited and, therefore, investors must sell them or exercise their rights to determine the economic value. The amount received by the owner of the unlimited Multi Warrant when exercised or sold depends on the Net Present Value on the corresponding valuation day.
faqs
Frequently Asked Questions about Warrants
Also known as exchange-traded or structured products, they are financial instruments that are traded on organized markets, as if they were stocks. They allow investors to access complex investment strategies (such as leverage, protection, or exposure to multiple assets) in a simple, transparent way with real-time pricing.
There are products for all profiles: conservative (seeking protection), moderate (seeking returns with conditions), and speculative (seeking leverage and fast movements). The important thing is to fully understand the product's function and risk before investing.
Costs may include buy/sell commissions, spreads (the difference between the buy and sell price), and in some cases, implicit costs such as the daily adjustment in leveraged products. They usually do not have management fees like funds.
Specialists are entities responsible for providing liquidity in the market, ensuring that buy and sell prices are always available for the exchange-traded products. This allows investors to enter and exit the market easily.
For most warrants, the minimum unit of negotiation is one unit of the product, which allows for an accessible investment even with small amounts.
In general, the gains or losses obtained from warrants are taxed as capital gains or losses in the Personal Income Tax (IRPF), just like shares. They are not subject to withholding tax at the time of sale and are taxed on the savings base according to the current tax brackets. However, there is an important exception: certificates are subject to withholding tax at the time of collection, since, from a tax perspective, certificates are considered returns on movable capital.
It is important to consult the current tax regulations or seek professional advice, as taxation may vary depending on the product, the operation, and the investor's profile.
Options are standardized contracts negotiated on organized derivatives markets (such as MEFF or Eurex), which grant the right to buy or sell an asset under fixed conditions. In contrast, warrants are securities issued by a financial entity, which are traded like a stock on organized markets and allow retail investors to replicate the behavior of an option in a more accessible way.
Another important difference is that options can be sold short to generate a premium (for example, selling a call option), while warrants cannot be sold short: they can only be bought and then sold. Furthermore, options are primarily intended for professional or institutional investors, while warrants are focused on the retail public, with simpler operations.
They are traded on organized markets, such as BME (Bolsas y Mercados Españoles), and can be bought or sold through authorized investment platforms or financial intermediaries. Additionally, they have daily liquidity thanks to the presence of a specialist.
Yes. Exchange-traded structured products are traded on regulated markets and are subject to supervision by bodies such as the CNMV (in Spain) or its equivalent in each country. Furthermore, they must have specific legal documentation (such as the KID – Key Information Document for the Investor) that details their risks, operation, and costs.
Warrants, Turbos, Turbo Pros, and Multis offer leverage, which allows for amplifying the movements of the underlying asset, both up and down.
Products such as Bonus, Bonus Cap, or Discounts can offer a certain level of protection, provided that specific conditions are met, such as not breaching a barrier or remaining within a range.
The main risk is that losses can be rapid and significant due to the multiplying effect of leverage. The sensitivity to market movements is much greater.
They can be linked to stocks, indices, commodities, currencies, bonds, or thematic baskets. The variety is very wide and allows for building strategies on almost any type of asset, national or international, with different levels of risk and volatility.
No. In these products, the risk is limited to the capital invested. An additional contribution is never required, and there is no risk of indebtedness, unlike other derivatives such as futures or CFDs. The investor knows from the start how much they can lose.
A barrier is a price level of the underlying asset that, if reached or breached, can activate or deactivate certain conditions of the product. For example, it can nullify a guaranteed minimum return or cause the early cancellation of the product. It is a key condition that defines the product's behavior in response to certain market movements.
It is a price level of the underlying that, if reached, automatically cancels the product. In most cases, it implies the total loss of the capital invested. It is common in products with leverage and high risk, such as Turbos or Warrants.
Investing in a stock means becoming an owner of a part of a company, participating directly in its market performance (up or down) and, in some cases, receiving dividends. In contrast, a structured product does not grant ownership over the underlying asset but instead replicates or modifies its behavior according to predefined rules. It can offer protection, leverage, or special return conditions that a stock alone does not have.
They are typically issued by investment banks or specialized financial institutions. The issuer is the one who designs the product's structure, brings it to market, and guarantees its redemption according to the agreed-upon conditions. Therefore, there is a credit risk: if the issuer goes bankrupt, the investor may not recover their investment, even if the product performed well.
It means that the product multiplies the variations of the underlying asset, allowing for greater gains with a smaller investment... but also assuming greater losses. For example, x5 leverage means a 2% rise in the underlying turns into a 10% gain, but also that a 2% drop implies a 10% loss.
Maturity is the date on which the product's life ends and its redemption value is determined. Most warrants do have a maturity date. Some, like certain daily leveraged products, do not have a maturity date, but they must be actively managed due to their daily cumulative behavior.
No. These products are classified as issuer debt; they are not covered by deposit guarantee funds. If the issuer becomes insolvent, the investor may lose part or all of their investment, even if the product has performed favorably. Therefore, it is important to consider the issuer's solvency.
Because the underlying asset is not the only factor. The product can be affected by:
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The time remaining until maturity.
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Market volatility.
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The accumulated daily performance (in products with daily leverage).
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Or having touched a barrier in the past.
All of these factors can cause the product's price not to directly reflect the positive performance of the underlying.
Not in all cases. Some products (such as daily leveraged products) are not designed to be held over time, as their performance is distorted by the accumulation of daily returns. Others, such as certain products with partial or conditional protection, can be held until maturity if they suit the investor's profile. It is important to understand the optimal time horizon for each product before investing.
Structured products allow for building more flexible and tailored strategies:
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Profitability in sideways markets.
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Partial protection against drops.
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Access to leverage without the need for complex derivatives.
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More affordable entry premiums.
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Ability to generate returns in bearish markets.
However, this comes at the cost of greater complexity, lower liquidity in some cases, and specific risks such as issuer risk or loss from touching a barrier.
If the underlying asset trades in a foreign market, such as the U.S. or Asia, and the product (for example, a Turbo or a Multi) is traded in Spain, there may be a time lag. Due to this potential time difference, the investor should specially monitor the underlying's value to be able to react as quickly as possible to movements in its home market