What is a Covered Warrant?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 February 2020
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Covered warrants are financial instruments that are issued by different types of financial institutions. Warrants of this type provide a type of leveraged exposure for investors in regard to various commodities, equities, and other kinds of investments. Holding a covered warrant allows the investor the privilege of buying or selling the underlying security connected with the covered warrant, without actually requiring that he or she execute a transaction at a specific point in time. For this reason, the warrant is considered an excellent tool that makes it possible to monitor the movements of the underlying security, and decide when and if to take any action, based on both the current state of the security and the projected future movements within a given period of time.

When holding a covered warrant, the investor has three basic options. The first is to exercise the instrument and conduct what is known as a call warrant. This simply means to buy the underlying security. Another option is to exercise what is known as a put warrant, which simply means to sell the underlying security. With both these options, the investor is able to specify both the price and the date that the transaction takes place. The third option is to simply maintain control of the covered warrant, and take no action in regard to the underlying security.


One of the benefits of a covered warrant is that it can help to limit the amount of loss that the holder can experience. With most configurations of the instrument, losses are limited to no more than the price or premium paid to secure the warrant. This means that the covered warrant is considered a type of limited liability instrument. As such, it is an excellent tool when it comes to attaining a position of leverage that allows the potential for an excellent return while also helping to minimize risk.

Along with the lower risk, the covered warrant also provides a couple of other benefits to the investor. First, the cost is normally lower than with other investment strategies, another feature that helps to enhance the chances for earning a return. The flexible nature of the warrant also makes it attractive to many investors, since it allows a nice range of options. A warrant of this type also works very well as a component in a larger investment strategy, since it can be used in conjunction with other methods and approaches to help maximize the efficiency of the investor’s actions as he or she seeks to increase the value of an investment portfolio.

Covered warrants have gained in popularity in recent years, especially in Europe. Over time, this type of warrant has also made some inroads among investors in the United States, Canada, the United Kingdom, and a number of South American countries. As more investors become aware of the practicality of this type of investment tool, especially in times when there is a significant amount of uncertainty within various investment markets, there is no doubt that the covered warrant will continue to attract the attention of even more investors.



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