This type falls in the category of structured products
The income on spread-warrant is limited, while investor can lose everything. It is designed for an investor who expects a limited growth (bull spread) or a limited fall on an underlying asset (bear spread) and a low volatility of the underlying asset price.
Bull spread-warrant allows the investor to earn maximum income at the closing price higher the upper exercise price (upper strike). If the underlying asset price is considerably higher than the upper strike, the investor’s income will not increase. At closing at the level or lower than the lower exercise price (lower strike), the investments will be lost.
Bear spread-warrant offers a visa versa scheme: the investor expects the closing the underlying asset price at the level of lower strike. If the forecast is wrong, the investor loses the money with the underlying asset price higher or at the level of upper strike.
The advantage of spread-warrant is that the investor pays less than the underlying asset price, and he gets the opportunity to earn in the “sideway” market. It gives the leverage effect.
Investor with the capital of $ 100 expects that Apple share, which now is $ 100, will grow in price by $ 3 during a month, but it will not be less than $ 97. The investor can lose or earn $ 3, but he has to spend $ 100 to participate in the strategy. Instead of that, he can buy spread-warrant, whose price is far lower. The price of spread-warrant depends on the underlying asset price, strikes, volatility, warrant term, interest rates. Let’s assume it will be $ 3, in other words the investor doesn’t spend $ 100 while he has the same opportunity to earn. In the same way, the investor can double the invested sum. He can invest the rest $ 97 in other assets or buy spread-warrant for the whole capital and double the capital.