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Assume you have a Warrant and an Option both with the same economics i.e strike, expiry, type etc. Also assume that the Warrant has been issued by a high grade reputed issuer (i.e there is a almost a 0 chance of default).

Under these circumstances why would a buyer buy a Warrant vs the Option?

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    $\begingroup$ Some reasons: Depending where you live, they are treated differently when it comes to taxes. Thus, one of the two may be preferable to another. Some investors like to write options, which you can't do with warrants. In general, options are more standardised. $\endgroup$ – KeSchn Sep 12 at 14:02
  • $\begingroup$ The tax implications make sense. Thanks for that. Though standardization on options isn't a valid point for my question since I am comparing a like for like option and warrant $\endgroup$ – v2. Sep 13 at 8:43
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two reasons might be:

1.) Usually, warrants are not traded on exchanges but only issued by a company. So if you want to sell/buy warrants you have to accept the prices which are quoted by the issuer and his pricing might be less obvious.

2.) Warrants typically give you access to newly issued stocks, which causes dilution whereas options refer to already issued stocks. This feature might be part of an investment strategy.

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    $\begingroup$ To add on the topic of dilution, after a warrant has been issued the probability of stock dilution (that would result from new stock issuance if the warrant is exercised) is already factored in the stock price dynamics, so the payoff economics is the same for the warrant and for the option. In fact the stock price should jump down on the day the warrant issuance is announced, because there is now a non zero probability of stock dilution in the future. $\endgroup$ – Antoine Conze Sep 13 at 7:24
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It is generally the case that warrants are issued on securities for which there are not liquid option alternatives. For pretty much the reasons implicit in the original question!

So - usually - warrants exist on more illiquid underlyings. Else they start their life as longer-dated options on liquid securities, where listed options don’t have liquidity beyond say 3, maybe 6, months.

So the assumption of identical economics is usually the sticking point.

Assume identical economics, and the only real other reason is for an investor who does not have access to the futures and options markets to gain access to optionality. Hence the retail bias of warrants. Warrants allow leverage-constrained investors to take on economically-levered exposures without levering the portfolio. They are “only” 1x long something that is itself Xx exposed. Legally and mandate-wise, this is “different” to being Xx levered to the vanilla.

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  • $\begingroup$ Another example of the last thing mentioned: a mutual fund might be prohibited in its charter from buying options (considered too speculative), but they may have some obscure clause giving permission to buy warrants. $\endgroup$ – Alex C Sep 13 at 2:13
  • $\begingroup$ Correct, @AlexC. The other dimension here is that warrants can incorporate multi-legged structures and structures that systematically roll over their exposures where the investor does not want to do this themselves on a regular basis. Whatever anyone might think about the merits or not of eg autocallables or cliquets, it would even worse for those investors who own but don't really understand them to try to directly replicate themselves! $\endgroup$ – demully Sep 13 at 9:48

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