Warrant Terms Explained: A Comprehensive Guide to Strike Price and Expiry Date

Warrants, also known as subscription warrants, are among the most closely watched derivatives in the Hong Kong market. For investors looking to participate in the market with relatively small amounts of capital while capturing short-term opportunities, warrants offer a leveraged investment option. However, before entering the warrants market, investors need to fully understand the key product terms, especially the two core elements: the strike price and the expiry date. These terms not only dictate how warrants are priced, but directly affect investment returns and risks. This article will break down these key terms in an accessible yet comprehensive way, helping you grasp how strike price and expiry work in practice.

Overview of Warrant Terms

A warrant is a financial product that grants the holder the right to buy or sell the underlying asset at a predetermined price (the strike price) within a specified period (up until the expiry date). Unlike direct stock trading, the warrant holder possesses an "option" rather than an "obligation": that is, the investor has the choice to exercise this right or not.

Currently, all warrants in the Hong Kong market are European-style and settle in cash. This means settlement only happens on the expiry date, and exercise does not involve physical delivery of stocks—the issuer will automatically calculate the cash settlement amount based on the final settlement price and credit it to the investor’s securities account.

Warrants are mainly divided into two types: Call Warrants and Put Warrants. Call Warrants give the holder the right to "buy" the underlying asset at the strike price, suitable for bullish investors; Put Warrants give the holder the right to "sell" the underlying asset at the strike price, suiting those with a bearish outlook.

In Hong Kong, the underlying asset for warrants can be stocks, indices, commodities, or forex. Longbridge Securities offers warrant trading services in the Hong Kong market, allowing investors to participate in warrant investing.

Tip: Warrants are leveraged products and carry higher risk. Be sure to fully understand the product terms and your own risk tolerance before investing.

Strike Price: The Core Definition in Warrant Terms

The strike price, also known as the exercise price, is one of the most critical parameters for warrants. It refers to the pre-set price at which the warrant holder may buy (for call warrants) or sell (for put warrants) the underlying asset on the expiry date.

How the Strike Price Determines Warrant Value

The relationship between the strike price and the market price of the underlying asset determines whether a warrant is "in-the-money", "at-the-money", or "out-of-the-money". This status directly affects the intrinsic value of the warrant at expiry.

For call warrants:

• In-the-money: The underlying asset's market price is higher than the strike price, giving the warrant intrinsic value.
• At-the-money: The market price equals the strike price.
• Out-of-the-money: The market price is lower than the strike price, so the warrant has no intrinsic value.

For put warrants, the situation is reversed:

• In-the-money: The underlying asset's market price is lower than the strike price, giving the warrant intrinsic value.
• At-the-money: The market price equals the strike price.
• Out-of-the-money: The market price is higher than the strike price, so the warrant has no intrinsic value.

Strike Price and Investment Strategy

Selecting warrants with different strike prices reflects different investment strategies and risk/return profiles.

If you expect the price of the underlying asset will surge sharply in the short term, an out-of-the-money call warrant provides higher leverage and more potential upside, but also higher risk since the underlying must rise substantially to become profitable.

On the other hand, if you expect only moderate increases or sideways movement, at-the-money or slightly in-the-money warrants have lower leverage and require a less dramatic move in the underlying, making them easier to profit from.

The Role of Strike Price in Settlement

The strike price plays a crucial role at warrant settlement. The cash settlement calculation formulas are:

Call Warrant Cash Settlement Amount = (Settlement Price - Strike Price) ÷ Conversion Ratio

Put Warrant Cash Settlement Amount = (Strike Price - Settlement Price) ÷ Conversion Ratio

If this result is negative or zero, the warrant holder receives nothing and the warrant expires worthless. Thus, the difference between strike price and settlement price ultimately determines whether you profit.

Tip: When choosing warrants, consider not only strike price, but also factors like expiry date, conversion ratio, and implied volatility.

Expiry Date: Key to Mastering Time Value

The expiry date is another core warrant term, indicating the effective period for the warrant holder's rights. Every warrant has a preset expiry date, and the value of a warrant will gradually erode as the date approaches.

The Difference Between Last Trading Day and Expiry Date

Investors should note that the "last trading day" and the "expiry date" are not the same. According to the Hong Kong Stock Exchange rules, the last trading day is the fourth trading and settlement day before the expiry date. This means you must sell your warrant on or before the last trading day if you want to exit—otherwise, you'll have to wait for final settlement at expiry.

For example, if a warrant's expiry date is December 15, 2025 (Monday), its last trading day will be December 9 (Tuesday), which is the fourth settlement day before expiry. If you want to exit before expiry, you need to do so on or before December 9.

Expiry Date and Time Decay

A warrant’s price consists of two parts: intrinsic value and time value. Intrinsic value is based on the gap between the underlying asset’s market price and the strike price. Time value reflects the possibility that the underlying asset price will change before expiry.

As expiry approaches, the time value of a warrant declines—a phenomenon known as "time decay." The closer to expiry, the faster the time value erodes.

For at-the-money or near-at-the-money warrants, time decay has a stronger effect. Even if the underlying price stays flat, the warrant’s price will decline due to the loss of time value. Therefore, investors must always monitor the impact of time decay on their holdings.

How to Choose the Right Expiry Date

The time to expiry is an important consideration in warrant selection. Typically, warrants expiring in the next 3 to 9 months offer a good balance of time value—not so near as to face rapid time decay, but not so distant as to incur excessive time cost.

If your plan is short-term holding (a few days to several weeks), time decay is less of an issue, and short-dated warrants offer higher leverage. For longer holding periods, long-dated warrants help avoid severe time decay eroding your returns.

Tip: No matter which expiry date you choose, regularly review your positions to prevent losses from unnoticed time decay.

Detailed Explanation of Warrant Expiry-Settlement Mechanism

Understanding how warrants are settled at expiry is key to mastering the product. In Hong Kong, warrants use European cash settlement—investors need take no action, as the issuer will automatically calculate and credit the settlement amount.

Settlement Price Calculation for Stock Warrants

For stock warrants, the settlement price is not the closing price on expiry, but the average closing price of the underlying stock for the five trading days prior to expiry. This reduces the risk of price manipulation and more accurately reflects the market.

For example, if a stock warrant expires on December 15, 2025, the settlement price will be the average closing price for December 8, 9, 10, 11, and 12. The expiry date closing price (December 15) is not included.

Settlement Price Calculation for Index Warrants

For index warrants, the method differs. Their settlement price is typically the official settlement value of the relevant index on the expiry date. For example, for Hang Seng Index warrants, the settlement price is based on the HSI’s official settlement value on expiry.

If the expiry date is a half-day trading session, the settlement mechanism may be adjusted. Always check the specific settlement arrangement for an index warrant before investing.

When Does the Settlement Amount Get Paid?

If your warrant is in-the-money at expiry, the issuer will calculate the cash settlement and generally credit it to your securities account within three settlement days after the expiry date. The entire process is automatic, requiring no action from you.

If the warrant is out-of-the-money at expiry, the settlement amount is zero and the warrant expires worthless. This is why you should always monitor whether your warrants are in- or out-of-the-money to avoid holding worthless warrants to expiry.

Tip: In practice, most warrant investors choose to sell their warrants before expiry rather than wait for automatic settlement, allowing more flexible management of returns and risk.

Conversion Ratio: Another Important Warrant Parameter

Besides strike price and expiry, the conversion ratio is another key term. It refers to how many warrants are needed to buy or sell one unit of the underlying asset.

How the Conversion Ratio Affects Warrant Price

The conversion ratio directly impacts the price of a warrant. If other terms (strike price, expiry, implied volatility) stay the same, a lower conversion ratio (e.g., 10:1) leads to a higher warrant price; a higher ratio (e.g., 100:1) means the warrant price is lower.

This is because a lower conversion ratio means each warrant represents a greater stake in the underlying asset, so its price is naturally higher. Conversely, a higher ratio means each warrant controls less of the underlying, so it's priced lower.

Conversion Ratio and Leverage Effect

Conversion ratio also influences warrant leverage. Warrants with higher conversion ratios typically have a lower entry cost and may offer higher leverage and more sensitive pricing. When choosing a warrant, consider conversion ratio alongside strike price and other terms to assess the overall leverage.

Role of the Conversion Ratio at Settlement

At expiry, the conversion ratio is central to the settlement formulas:

Call Warrant Cash Settlement Amount = (Settlement Price - Strike Price) ÷ Conversion Ratio

Put Warrant Cash Settlement Amount = (Strike Price - Settlement Price) ÷ Conversion Ratio

A higher conversion ratio yields a smaller settlement amount, and vice versa. Always factor in the conversion ratio when estimating potential returns.

Tip: Don’t buy a warrant just because it looks cheap—always assess the conversion ratio, leverage effect, and other terms for a complete picture.

Premium: A Key Indicator for Warrant Cost

Premium is another important warrant parameter, reflecting how much (in percentage terms) the underlying asset price would need to move (up or down) for a warrant position to break even at expiry.

Premium Calculation

The premium formulas are:

Call Warrant Premium = {[(Warrant Price × Conversion Ratio) + Strike Price - Underlying Asset Price] ÷ Underlying Asset Price} × 100%

Put Warrant Premium = {[(Warrant Price × Conversion Ratio) + Underlying Asset Price - Strike Price] ÷ Underlying Asset Price} × 100%

The lower the premium, the easier it is to reach the breakeven point; the higher the premium, the greater the underlying move required to break even.

Relationship Between Premium and Investment Horizon

Premium mainly reflects the cost of holding a warrant to expiry. If you plan to hold through expiry, premium is a key consideration.

If you plan short-term trades and only hold for days or weeks, premium is less important. In those cases, daily time decay should be your bigger concern.

Relationship Between Premium and Time Value

At its essence, premium reflects the time value cost of a warrant: the "cost" of holding to expiry, while time value is the daily erosive component. For both call and put warrants, the closer you are to expiry or the strike price, the bigger the daily time decay.

So investors should balance between premium and time value according to their holding strategy. Short-term traders should focus more on daily time decay, while longer-term holders should watch overall premium.

Tip: A lower premium isn’t always better—a very low premium may mean a weaker leverage effect, diminishing the advantage of warrants.

How to Use Warrant Terms in Your Investment Decisions

Understanding warrant terms lets you make smarter investment choices. Here are some practical strategies:

Select Strike Price According to Market Outlook

If you have a clear directional view, choose a strike price to match your expected rise or fall in the underlying asset.

Choose Expiry Date According to Holding Period

Warrants closer to expiry provide higher leverage but require closer attention due to rapid time decay. Warrants with longer expiry offer more time value but lower leverage.

Compare Terms from Different Issuers

The same underlying asset may have warrants issued by different issuers, each with different strike prices, expiries, conversion ratios, and implied volatility. Always compare products and pick the one that best fits your investment strategy.

Longbridge offers various trading tools to help investors compare warrant terms and prices.

Use Stop-Losses to Manage Risk

Warrants are leveraged products and can be highly volatile. Set a stop-loss when buying. If the price hits your stop, sell without hesitation to prevent further loss. Always watch for time decay, and avoid holding out-of-the-money warrants for long.

Tip: Warrant investing requires continuous attention to the market and your positions—it is not a “set and forget” investment.

Frequently Asked Questions

What’s the difference between warrants and CBBCs (Callable Bull/Bear Contracts)?

Both are derivatives, but they have key differences. Warrants do not have a mandatory call mechanism; even if the underlying price moves against you temporarily, so long as it recovers before expiry, you can still profit. In contrast, CBBCs have a mandatory call price—once breached, the CBBC is immediately "called back", and you may lose all or most of your investment. Thus, warrants offer more flexible risk management, while CBBCs typically offer even higher leverage.

Can I sell warrants before expiry?

Yes. You can sell your warrants on any trading day before expiry. In fact, most warrant investors sell before expiry rather than waiting for settlement. Selling early is more flexible for risk and return, and helps you avoid rapid time decay. Note: you must sell by the last trading day—after that, you must wait for expiry settlement.

Do out-of-the-money warrants have investment value?

Out-of-the-money warrants have no intrinsic value currently, but still possess time value. If you expect a favorable move in the underlying before expiry, OTM warrants may provide substantial leveraged returns. However, risk is high, as the underlying must move considerably to become profitable; if it stays OTM at expiry, it expires worthless. Investing in OTM warrants requires strong market judgment and risk control.

How can I know the settlement amount for a warrant?

You don’t need to calculate it yourself—the issuer will do so at expiry and automatically credit any settlement proceeds to your account. But to estimate potential returns, use the formulas: for call warrants, Settlement Amount = (Settlement Price – Strike Price) ÷ Conversion Ratio; for put warrants, Settlement Amount = (Strike Price – Settlement Price) ÷ Conversion Ratio. If the calculation is negative or zero, there is no payout.

Are warrants suitable for novice investors?

Warrants are relatively complex derivatives, involving leverage and time decay, and carry higher risks. Beginners should thoroughly study how warrants work, their risks and terms before investing. It’s best to start with simulated trading or small amounts, building up experience before committing more capital. Assess your risk tolerance to ensure warrant investing matches your personal finances and investment objectives.

Conclusion

Strike price and expiry date are the core elements in warrant terms that determine investment returns. Strike price determines the in-, at-, or out-of-the-money status and settlement value, while expiry date controls the speed of time value decay. Investors must fully understand these mechanisms and, along with indicators like conversion ratio and premium, make informed investment decisions.

Warrants offer high potential returns from leverage but also carry greater risks. You should select warrant terms based on your outlook, investment horizon, and risk tolerance, while conducting ongoing monitoring and risk management.

Which investment tool to choose depends on your objectives, risk tolerance, market view, and experience. No matter what you choose, make sure you fully understand its workings, risks, and trading rules, and establish a solid risk management plan. For more investment knowledge, visit Longbridge Academy or download the Longbridge App.