Covered warrant

Covered warrant

Covered warrants give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price, during, or at the end of, a specified time period, and are issued by an entity other than the company that issued the underlying stock. When the issuer sells a warrant to an investor, they 'cover' (hedge) their exposure by buying the underlying stock in the market. Covered warrants have an average life of six to 12 months, although some have maturities of up to five years.

In contrast to 'traditional' equity warrants, with covered warrants no new issuance of common stock occurs if the warrant is exercised. The underlying shares of common stock are usually either owned by the issuer of the covered warrants or the issuer has a mechanism, such as owning equity warrants for the underlying shares, through which they can obtain the shares. Covered warrants have proved highly popular in Europe (especially Italy) due to their:

  • low cost
  • flexibility
  • limited liability
  • multi-strategy options
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