I have written a rudimentary program for fitting volatility surfaces for warrants of call and put options for the purpose of some basic scenario analysis. In my country, trading options privately in a non-commercial setting is very uncommon but the covered warrant market is very popular.

I have noticed that it is impossible to fit a volatility surface that fits the data points unless the input market prices are separated by issuer. For each issuer a smooth surface in the generally expected shape is observed, but for multiple issuers there are very clearly multiple intersecting surfaces differing in "shift" and shape, one per issuer.

  1. Is this because the warrant market is not liquid enough or inefficient and the different IV surfaces completely depend on the given issuer's specific risk prognoses?
  2. Does this allow for arbitrage in some way?
  • $\begingroup$ What country is this? $\endgroup$
    – AlRacoon
    Dec 17, 2020 at 18:55
  • $\begingroup$ @AlRacoon Germany. $\endgroup$
    – JMC
    Dec 17, 2020 at 19:14
  • 1
    $\begingroup$ I would generally very strongly expect for surfaces to be distinct across issuers; or expressed differently: not that easily interchangeable. $\endgroup$ Dec 17, 2020 at 20:15
  • $\begingroup$ Another way to think about it, the clients trading warrant XYZ on issuer A, most likely do not look or care about how warrant XYZ is trading on issuer B. $\endgroup$
    – pyCthon
    Dec 18, 2020 at 0:59

1 Answer 1


This is a really good observation. Warrants issuers systematically overprice their products compared to the listed options market. Different issuers will show different degrees of overpricing in similar products.

This depends on a few parameters but the main one is the respective issuer's outstanding position in that or similar products. Contrary to listed option market makers who will typically adjust in the direction of the trade (i.e. they increase the price as they keep selling), warrants issuers often do the opposite. They decrease the degree of overpricing as they sell more of a product.

So why does this overpricing exist in the warrants market to start with? As opposed to listed options, warrants cannot be sold short. The issuer typically creates an initial issuance volume - let's say 10 million contracts - that they fully hold. These contracts are legally debt obligations whose terminal payoffs are linked to some market observable such as a stock index.

Let's say for arguments sake that some listed option on the DAX trades at 99 @ 101 on Eurex. That means that any market participant can sell at 99 (buy at 101) if they think the option is over-priced (under-priced). The comparable warrant will typically trade at a similar spread, sometimes even at a lower one, but at a shifted mid price - let's say 109 @ 110. To the naive observer this might suggest that the warrants market is more liquid since the spread is lower. The caveat is however, that investors who are not already long the warrant cannot sell it. Right after issuance, the bid of 109 can thus not be traded at all.

As the issuer sells more of this product, they will systematically reduce the markup and sometimes even show a negative markup when they deem it to be more likely to buy back the product, e.g. because they sold nearly all of the issuance volume already. This margin adjustment typically doesn't happen instantaneously but the issuers smoothen it out over time so it becomes less visible.

Back to your question why different issuers show different implied volatility surfaces. They have different outstanding positions or they want to show less uncompetitive prices than their peers e.g. to increase their market share. Otherwise identical products of different issuers are not fungible so there is no arbitrage between them.

There are a number of academic studies that investigate the overpricing of retail products in general and warrants in particular. A good recent analysis which also contains some more references is this study by FIA EPTA.

Disclaimer: I used to work for a warrants issuer in Germany before and now work for a listed options market maker.


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