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What are warrants? A brief explanation
Warrants are publicly traded products that leverage an investment on an underlying asset, offering the possibility to obtain unlimited profits at a risk limited by the investment itself. These securities entitle their holders to buy (Warrant Call) or sell (Warrant Call) an underlying asset at a preset price on the date fixed beforehand.
Their main characteristics are the following:
- Warrants are derivative financial products: their price depends on the price the so-called underlying asset.
- They are traded in real time, in the Spanish Stock Market Interconnection System (SIBE), uninterruptedly from 9.05h through 17.30h.
- They are issued in a standardized manner by a financial institution, which commits to guarantee the liquidity of its issues at all times.
- The warrants market is subject to strict supervision standards that guarantee its transparency.
The price of the warrant, the premium
The price of the warrant, or “premium”, depends not only on the price of the underlying asset at all times, but also on how it is expected to evolve in the future. Thus, a warrant’s premium can be broken down as the sum of two factors:
- Intrinsic value: This value depends on relation between the asset’s market price and the warrant’s strike price.
- Temporary or extrinsic value: It is calculated based on other four factors, which are volatility, time until expiration, interest rates and dividends.