What are standard warrants?

A standard warrant is an instrument that gives the holder a right – but not the obligation - to “buy” or “sell” an underlying asset at a pre-set price (called the “exercise price”) on or before the expiry date. Standard warrants can be issued over a range of assets, including stocks, stock indices, currencies and commodities or a basket of assets. The list of eligible stocks for warrants over single stock is posted on the HKEX’s website. However, investing in a standard warrant does not give you any rights in or to the underlying asset. Currently, all standard warrants are cash settled when exercised on expiry.

There are two types of standard warrants:

(a) A “call” warrant may be invested in by an investor who believes that the price of the underlying asset will increase during the term of the standard warrant.

(b) A “put” warrant may be invested in by an investor who believes that the price of the underlying asset will decrease during the term of the standard warrant.

Typically, standard warrants in Hong Kong are issued with a life span of six months to two years, but are usually traded by investors before expiry. Standard warrants magnify your investment through leverage. This carries significant opportunities as well as significant risks. Standard warrants usually cost a fraction of the price of the underlying asset and may provide a leveraged return, but such leverage could also magnify your losses.

Standard warrants are a special form of option in which an investor can only take a long position in the standard warrants, just like option buyers. This means you can only take a long position in a call or a put warrant by buying such standard warrant and close out such long position previously established by selling such standard warrant – that is, you cannot short sell such standard warrant.

Your maximum loss will therefore be limited to the amount you pay for the standard warrant (plus any transaction costs, such as broker fees associated with your investment).