Investors are always looking for ways to maximize their gains and warrants, options and LEAPS are a good way to do just that. These investment vehicles are very similar to each other except for issue of time. [Let me explain.]
A call option is a contract that gives its owner the right, but not the obligation, to buy a specified number of shares at a predetermined price within a set period of time. Most call options have a life of 30, 60, 90 or 180 days.
Call options place you in the position of being a trader looking for short term gains with high risk associated therewith. You have to be correct on the direction of the markets, your individual stock choice as well as the timing of your entry and exit strategy. This is not so easy to do for the average investor with industry statistics suggesting that 80% – 90% of investors will lose their investment. However, for those few professionals who can manage risk and have a short term horizon, this can be profitable and exciting.
LEAPS, which stands for Long Term Equity Anticipation Securities, are also options as defined above but have a longer life of as much as 2 years…
Options and leaps are actually created or written by investors who write an option and keep the premium (the amount paid) as income. The underlying company receives nothing.
A warrant is a security giving the holder the right, but not the obligation to acquire the underlying security at a predetermined price and for a specified time. Sounds a lot like call options and leaps, right? Well, yes and no. Warrants are actually issued by the underlying company, normally in connection with a financing arrangement and are sometimes called a “kicker” or “equity kicker”. They are usually issued by the company for at least 2 years and sometimes up to as much as 7 years.
While most warrants will never trade but are held by mutual funds or other private investors who have provided the financing there are almost 100 warrants, however, that do trade freely on either the U.S. or Canadian stock exchanges. These warrants trade similar to their underlying stocks and will fluctuate up and down with the price of the stocks and can be purchased through your brokerage firm.