Why are future and options viewed as dangerous

Trading Warrants: Big Profits at High Risk?

With warrants, you acquire the right to buy or sell a share in the future, for example. There are high profits - but also higher risks. For whom warrants are worthwhile.

Often times in life you have options. When you go to the cinema, for example, you choose between the shallow Schweighöfer comedy or an action flick with Liam Neeson.

There are also options when it comes to investing money, literally: With warrants, you acquire the option of buying a security - such as a share - that you can draw in the future. t-online explains how warrants work and why they are so risky, especially for beginners.

How do warrants work?

Warrants belong to the financial product group of Derivatives. That is, their value is derived from the price of a security on which the warrant is based. This can be a share, for example, but also an entire index or a commodity such as gold or oil.

Buy a warrant, too Warrantcalled, you make a kind of bet with the provider of the note, the issuer.

This gives you the option to buy or sell a certain security within or after a certain term at a fixed price. So warrants are very speculative.

Where to buy warrants

You can purchase warrants from either one Online broker or buy it from a direct bank on the Internet. The trade therefore runs through your securities account. Or you can purchase the warrants directly from the Stock exchange.

Good to know: Often warrants are also issued as part of a bond with warrants. Then you will receive small interest payments from the company that issues the option bond.

As with all derivatives, warrants also depend heavily on the Underlying, the so-called Underlying, from. A base value can be, for example, a share, a bond or an entire index such as the Dax.

A basic distinction is made between two options for warrants: Warrants that provide for a purchase are called "Call". Warrants that aim to sell an underlying asset are called "Put".

The term is usually a few months. A warrant is therefore also referred to as aForward deal. But most of the people who trade warrants are not interested in actually buying the value in the end. Rather, they are looking for short-term gains.

Good to know: The value of a warrant depends both on the volatility of the underlying asset, i.e. the fluctuation range, and on the term.

Warrants have a leverage

If it is only possible to buy or sell the underlying at the end of the term, it is called a "European" option type. At a "American" warrant however, you can buy or sell the underlying asset over the entire term. The latter are the standard for warrants.

Now there are two options: Either the underlying will develop as you predicted. In this case you made a profit.

However, if the underlying has not performed as you would like, you will lose the capital you invested. This is reinforced by a Leveragewho have warrants (see below). You do not have to buy or sell the underlying asset at the end or during the term, however.

Why can the losses with warrants be so high?

Warrants are among the Leverage products. Because with a warrant you only have to use a fraction of the underlying to be able to participate disproportionately in a price change. This leverage effect also makes warrants so dangerous for private investors. Because this can be associated with high losses.

The leverage is calculated from the Subscription ratio, the Course ofUnderlying and the Warrant price. But in order:

  • Subscription ratio: The subscription ratio indicates how many warrants you need to buy or sell the underlying asset. Example: With a subscription ratio of 0.1, you need ten warrants to buy or sell a share.
  • Underlying price: This is the price of the underlying that a warrant represents. Example: A share that stands at 50 euros.
  • Base price: The base price, also known as a strike, certifies the right to buy or sell the base value at a time. However, there is no obligation to do so (see above).
  • Warrant price:That is the price of a warrant. This is the sum of the intrinsic value and the current value.
  • Intrinsic value: It is the difference between the price of the base value and the base price of the warrant. The intrinsic value therefore indicates how expensive it would be for the investor to redeem the warrant immediately.
  • Value:The current value is a kind of premium. It decreases the shorter the remaining term.

Example shows the ratio of the key figures

To put all these terms in relation to one another, let's look at a simplified example with no time value.

  • You buy a call warrant on a stock. TheWarrant price is 20 euros. The Base priceat which you could buy the stock later amounts to 80 euros. The price of the share (Underlying price) is 100 euros at the time of purchase. So you could currently acquire the share at the same price as a direct investor in the market, namely for 100 euros (base price + warrant price).
  • Case 1: The stock rises. If the share rises to 115 euros, the value of the warrant also rises. Since we waive a fair value, the warrant price corresponds to the intrinsic value; it is calculated as follows: 115 euros (new base price) - 80 euros (base price) = 35 euros (price of the warrant).
    As you can see: In absolute figures, both the share and the warrant increase by 15 euros. But the leverage becomes clear in percentage figures: While the share rises by 15 percent, the price of the warrant rises by 75 percent.
  • Case 2: The stock falls. Conversely, if the share falls by 15 euros to an underlying price of 85 euros, the warrant price also falls. Following the same pattern as with the increase, the warrant price is now 5 euros. Again, the relative loss for the warrant is higher: while the share falls by 15 percent, the warrant price falls by 75 percent.

If the price of the share falls below the base price - in the example below 80 euros - the warrant would be worthless. If you had to sell the warrant (at the end of the term), you would have one Total loss suffered.

Note: The lever can change over time. This can further increase your risk.

When it can be worthwhile to redeem warrants

Warrants are rarely actually redeemed. It's only worth it anyway if the warrant "in the money" is ("in the money"). This is the case with a call warrant if the price of the underlying is above the strike price. In the case of a put warrant, the opposite applies, i.e. the price of the base value is below the base price.

A warrant, however, is "at the money" ("at the money"), if the price of the underlying is equal to the strike price. This applies to both calls and puts. In this case there is no intrinsic value (price of the underlying asset - base price = 0).

"Out of the money" ("out of the money") is a call warrant if the price of the underlying is below the strike price. In the case of a put warrant, the reverse applies: the put is "out of the money" if the price of the underlying is above the strike price.

Table for a better overview:

WarrantsCallPutIs it worth redeeming?
"In the money"Base value above base priceUnderlying below the base priceYes
"At the money"Base value equals base priceBase value equals base priceNo
"Out of the money"Underlying below the base priceBase value above base price


Are warrants worthwhile for me?

That depends on how well you are familiar with various financial products. As an advanced or financial professional, warrants can be a good option for you to speculate on future market developments - or to hedge other risks (see below).

If, on the other hand, you are new to the stock market, warrants are probably not a good option for you as they are a highly speculative form of investment that is not suitable as a long-term investment. A significantly lower-risk asset class, on the other hand, are so-called Index funds or ETFs. These are passive funds that replicate a stock index like the Dax. So you invest in all stocks that are listed in the index. In the case of the Dax, these are companies like Allianz, Siemens or Volkswagen.

With an index fund, you spread your risk widely. Should a company do poorly, this has little effect on the entire stock index. In the long run, however, the share index price will rise. For you, this can be a decent return on a long-term investment.

Warrants as deposit protection: In certain cases - for example if you expect that the price of your shares in the portfolio could fall - you as an investor could buy a put warrant. In this way, they buy the right to sell the shares at a certain price without the prices having previously fallen even more. But that is also risky. If the stocks go up, the put is pointless and you have suffered a loss.