Structured products & theme-based investments

Leonteq Know-How 14What are Warrants? A guide for retail investorsWarrants are among the most popular leveraged products on the market and enable investors to participate disproportionately in price movements of an underlying asset with a comparatively small capital outlay. But what exactly are Warrants, how do they work, and what should investors consider before investing? This article provides a concise introduction.1. What are Warrants?Warrants are exchange-traded securitised derivatives that grant the holder the right to buy (Call Warrant) or sell (Put Warrant) an underlying asset – such as a share, an index or a commodity – at a predetermined price (the so-called exercise price or strike) up to a specified date. Unlike Mini-Futures and Warrants with Knock-out Open-End, Warrants have a limited maturity. Within this time frame, investors can position themselves for rising or falling prices – with clearly defined risk and potentially high returns.2. Call vs. Put WarrantsThere are two basic types of warrants:

Call Warrants: These benefit from rising prices of the underlying asset. If the price rises towards or above the exercise price, the value of the Call increases disproportionately compared with the underlying asset itself (leverage effect).

Put Warrants: These benefit from falling prices. If the price declines, the Put Warrant gains in value.

Both variants offer leverage – small price changes in the underlying asset can have a significant impact on the price of the Warrant.3. How does a Warrant work?A Warrant essentially consists of three key components:

Exercise price (also called strike): The price at which the investor can buy (Call) or sell (Put) the underlying asset.

Maturity: Indicates how long the right arising from the Warrant exists. After expiry, the Warrant becomes worthless – unless it is “in the money”.

Intrinsic value + time value: The price of a Warrant is composed of the intrinsic value (difference between the market price and the strike) and the time value (depending on maturity, volatility and interest rate levels).

4. Example: Call Warrant on a ShareAn investor purchases a Call Warrant with a strike of CHF 100 and a maturity of 6 months. The underlying share is currently trading at CHF 105.Illustrative price development:

Share rises to CHF 115: The intrinsic value of the Warrant is now CHF 15. Depending on the leverage, the Warrant may increase significantly in value.

Share falls to CHF 95: The Warrant is “out of the money” and loses significant value. If the share price is at CHF 95 at maturity, the Warrant expires worthless.

5. Factors influencing the price of a WarrantThe price of a Warrant is influenced by several factors: The closer the expiry date approaches, the more time value the Warrant loses – this is referred to as time decay.6. Opportunities and risks of WarrantsOpportunities:

High leverage: Significant gains possible with a small capital investment.

Market expectations: Suitable for both rising (Call) and falling (Put) markets.

Clear structure: Transparent product parameters (strike, maturity, conversion ratio).

Risks:

Total loss at expiry: If the Warrant is “out of the money” at expiry, the invested capital is lost.

Time decay: The value decreases as the remaining maturity shortens, even if the underlying price does not change.

High volatility: Can represent both an opportunity and a risk – sudden fluctuations have a strong impact on the price.

7. Conclusion: Are Warrants the right product for you?Warrants are attractive instruments for experienced investors who wish to exploit short-term market opportunities with clearly calculable risk. The key advantage: the loss potential is limited to the invested amount, while profit potential can be substantial due to leverage.However, it is essential to fully understand the maturity, strike and the interaction of the pricing factors. Investors who understand the mechanics and implement their market expectations in a targeted manner can unlock attractive return opportunities with Warrants.Would you like to learn more about using Warrants in your investment strategy? Our experts will be happy to support you.

We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.