Equity Warrants and Shorting Stock

We recently received a question about warrants and short stock positions. One of the strategies that can be used profitably with warrants is to buy warrants and short common stock. This results in a short position in the common in your brokerage account.

The question is can your long warrants now be used to “close out” your short position. The short answer is no. You cannot inform your broker to cover your short position with the long warrant position in your account. These positions are considered completely separate by most large brokerage firms (e.g. Fidelity). They do not produce the same capital impacts (usually to your advantage) in your account that spread trading options or certain other risk mitigating strategies involving options can produce.

Now, having said that there is another alternative. If the math works out and you want to exercise your warrants in order to close your short position this is perfectly acceptable. To do this you must contact your broker and instruct them to exercise your warrants, obviously you must be able to meet the terms for exercising. If there is a cash element to the exercise you must have this cash available in your account.

When the warrants are exercised the stock that you receive in return will usually automatically be used to close your short position. If it is not done automatically you may contact your broker after you receive the common stock from the exercise and request that they close your position by netting out the long and short common stock.