Warrant Premium

Warrant Premium: Meaning, Calculation, and Examples

A warrant premium is the extra amount investors pay for a warrant above its intrinsic (minimum) value. It reflects the market’s expectation about the underlying stock’s future price movement and other factors such as time to expiration and volatility.

What a warrant is (brief)

• A warrant is a company-issued instrument that gives the holder the right, but not the obligation, to buy a specified number of shares at a fixed exercise (strike) price before a set expiry date.
• Warrants are similar to call options but are issued by the company (not the exchange) and, if exercised, the company issues the shares.

How warrant premium works

• Intrinsic (minimum) value of a call-type warrant = max(0, current share price − exercise price).
• Warrant market price typically exceeds intrinsic value by the warrant premium, which compensates for time value and expectations of further share price increases.
• Factors that increase premium:
• Longer time to expiration (more time for the stock to rise)
• Higher volatility of the underlying stock
• Higher demand for the warrant
• As expiration approaches, time value declines and the premium typically shrinks (all else equal).

Calculations

Absolute premium:
– Premium = Warrant market price − Intrinsic value
– Intrinsic value = max(0, Current share price − Exercise price)

Percentage premium (cost comparison to buying the stock directly):
– Cost to acquire one share via warrant = Warrant price + Exercise price
– Percentage premium = [(Warrant price + Exercise price − Current share price) / Current share price] × 100

Example

• Warrant price = $10
• Exercise price = $25
• Current share price = $30

Intrinsic value = max(0, $30 − $25) = $5
Absolute premium = $10 − $5 = $5

Percentage premium = [($10 + $25 − $30) / $30] × 100 = ($5 / $30) × 100 ≈ 16.7%

This means exercising the warrant costs about 16.7% more per share than buying the share in the open market right now.

Warrants vs. Options

• Issuer: Warrants are issued by the company; options are exchange-traded contracts between investors.
• Settlement: Warrants typically result in newly issued company shares; options usually transfer existing shares between investors.
• Lifespan: Warrants often have much longer expiries (sometimes up to 10–15+ years) versus typical listed options (commonly up to 1–3 years).
• Writing: Traders generally cannot write (create) warrants; companies issue them.

Warrants vs. Stock

• Warrants do not pay dividends and do not confer voting rights while outstanding.
• They are potential claims on future shares; exercising converts the warrant into shares with full shareholder rights.

Warrant “Sweeteners”

Companies may attach warrants to other securities (e.g., bonds or preferred stock) to make the offering more attractive. These attached warrants are called “sweeteners.”

Dilution and Earnings Per Share (EPS)

• Warrants represent potential new shares. If exercised, they increase the total number of outstanding shares and can dilute EPS.
• Analysts and investors often use fully diluted EPS, which incorporates all potential shares from warrants, convertible securities, and employee stock compensation, to gauge the possible post-exercise earnings per share.

Key takeaways

• Warrant premium = market price of warrant − intrinsic value (current share price − exercise price).
• Premium reflects time value and expectations of future stock appreciation.
• Percentage premium compares the cost of acquiring a share via warrant to buying it on the open market.
• Warrants differ from exchange-traded options (issuer, settlement, expiry) and can dilute EPS if exercised.