Warrants
A warrant is a right, issued by the company itself, to buy new shares of its stock at a set price, the exercise price, until a set date. When a holder exercises, the company creates new shares, so warrants are dilution waiting to happen. Small caps often attach them to offerings to make the deal easier to sell.
Why it matters to a small-cap momentum trader
Warrants turn a price level into supply. Once the stock trades above the exercise price, a warrant holder can pay that price for a share and sell it in the market at a profit. Many do it the moment they can, so a stock running into a large block of warrants often meets steady selling just above their exercise price. The price itself is in the filings, so it is a level you can know before the open.
How warrants work
Exercise price and term. Each warrant lets the holder buy a set number of shares, usually one, at the exercise price, until it expires, often five years after it is issued. Some can be exercised at once; others only after a waiting period or a shareholder vote.
Exercise for cash. The holder pays the exercise price, the company issues new shares and receives the cash.
Cashless exercise. Where the terms allow it, the holder gives up part of the warrant instead of paying, and receives fewer shares worth the profit.
Where to find them. The 424B prospectus or the 8-K for the offering lists how many warrants were sold, their price, when they can be used and when they expire. The quarterly report lists the warrants still outstanding.
Some warrants are listed and trade on their own, usually with a symbol ending in W. Listed warrants have no LULD bands, so they can move further in a minute than the stock.
Warrants vs options
A listed call option is a contract between two traders: when it is exercised, existing shares change hands and the company issues nothing. A warrant is issued by the company, and exercising it creates new shares. Warrants also tend to run for years rather than months, and their terms vary from one deal to the next.
A worked example: the warrant overhang
An illustration with round numbers, not a real stock or a real day.
The deal. A company with 10 million shares outstanding sells 4 million shares at 1.00, with one warrant per share, exercisable at once at 1.20.
After the deal. Shares outstanding = 10 + 4 = 14 million. If every warrant is exercised, shares outstanding = 14 + 4 = 18 million, and the company receives 4 million × 1.20 = 4.8 million dollars.
The run. News lifts the stock to 1.60. A holder who exercises at 1.20 and sells at 1.60 makes 0.40 a share. Across all 4 million warrants that is up to 4 million new shares for sale, more than a third of the original share count.
Cashless. At 1.60, one warrant exercised cashless is worth (1.60 − 1.20) ÷ 1.60 = 0.25 shares. All 4 million would become 1 million new shares.
Common mistakes small-cap traders make with warrants
- Not knowing the exercise price. It is in the filing. A breakout through it can stall as holders exercise and sell.
- Counting only today's float. Outstanding warrants are future shares. A stock with a small float and a large warrant count is not as thin as it looks.
- Mistaking a warrant symbol for the stock. A listed warrant can show a huge percentage move on a few cents. Check which one is on your chart.
- Ignoring price resets. Some warrants lower their exercise price after a later offering or a reverse split. Read the terms, not only the headline price.
Common questions
- What is the difference between stock warrants and options?
- An option is a contract between investors, and exercising it moves existing shares. A warrant is issued by the company, and exercising it creates new shares, which dilutes the holders. Warrants also usually last years, not months.
- Are warrants good or bad for a stock?
- They bring the company cash when they are exercised, but each exercise adds shares. For a trader, a large block of warrants near the price is supply that can cap a run.
- What is the difference between warrants and rights?
- Rights go to existing shareholders, usually to buy new shares at a discount for a few weeks. Warrants are often sold with an offering to new investors and last for years.
- What happens to warrants in a reverse split?
- Their terms are usually adjusted by the same ratio: after a 1-for-10, ten warrants at 1.00 typically become the right to buy one share at 10.00. The warrant agreement decides the details.
- Can you trade warrants like stocks?
- Listed warrants trade on the exchange under their own symbol, with their own quotes and tape. Many small-cap warrants are not listed at all and only show up in the company's filings.
How to practise it in Hindsight Markets
- Open a past trading day and find a small cap with a recent offering in its Filings window, under Offerings.
- Read the 424B or 8-K for the warrant count and exercise price.
- Draw a horizontal line at the exercise price and set a price alert just under it.
- Watch the tape and the Level 2 as the price reaches the line. Listed warrants can be found too: add the Type column to a scan and pick warrant.
- Trade it, and compare where it stalled with the line.
Practice this on a real past day in Hindsight Markets
Replay a small cap that sold stock with warrants attached, mark the exercise price, and watch how it trades as the price nears it.