Warrants, Options and Futures on French Markets: Mechanics and Tax Treatment

Part One: Warrants — How They Work

Definition and key characteristics

A warrant (bon d'option) is a negotiable financial contract traded on a stock exchange that confers an option right on its holder. The right relates to a specific financial instrument — the underlying asset or sous-jacent. It gives the warrant holder the right, but not the obligation, to buy (call warrant) or sell (put warrant) the underlying at a fixed price — the exercise price or strike — at any time up to a set expiry date.

An investor can buy a warrant and sell it later, but cannot sell a warrant short — it is not possible to sell a warrant that has not yet been purchased. This is a fundamental distinction from exchange-traded options, where investors can take either the buyer or seller side of a new contract. Warrant characteristics are freely set by their issuers; unlike standardised exchange-traded options, warrants are not standardised.

Warrants may be written on any financial instrument traded on a regulated or equivalent market: French and foreign equities, equity baskets, stock indices, index baskets, currencies, commodities, interest rates, negotiable debt instruments, financial futures, commodity futures, and listed derivative instruments on French or foreign markets.

Only credit institutions and investment firms — or entities subject to comparable supervision, or entities whose warrant obligations are unconditionally and irrevocably guaranteed by those two categories — may issue warrants. Warrants must relate to instruments issued by entities independent of the issuer. Issuance does not result in any new underlying securities being created. The company whose securities underlie the warrant cannot prevent the issuance, but can make observations that may appear in the issuance prospectus.

The building blocks of a warrant

Exercise price (strike). The price at which the warrant holder may buy (call) or sell (put) the underlying. Set by the issuer at issuance and cannot be changed except for corporate events affecting the underlying. For the same underlying, an issuer may propose multiple warrants with different strikes: at-the-money (strike close to current price), out-of-the-money (strike above the current price for a call, below for a put), or in-the-money (strike below the current price for a call, above for a put).

Life and expiry. The life of a warrant runs from the issuance date to the expiry date (date d'échéance or maturité). The issuer sets the life at issuance — typically 18 to 24 months, but ranging from six months to five years. After the expiry date the warrant is worthless. Warrants can be exercised at any time up to expiry (American-style — the most common in practice) or only on the expiry date itself (European-style). Warrants remain tradeable on the exchange until they are radiated from the listing, typically six trading days before the expiry date.

Parity and minimum trading unit. Parity is the number of warrants required to obtain one unit of the underlying. Common parities are 10:1, 100:1, and 1000:1. Each transaction must meet a minimum quantity — the quotité minimale de négociation — set by the issuer.

The premium (prime). The premium is the purchase price of the warrant — its market value. Its value reflects two components: the valeur intrinsèque (intrinsic value — the immediate gain if exercised now) and the valeur temps (time value — the additional amount reflecting the probability that the underlying price will move favourably before expiry). Time value is at its maximum at issuance and decays increasingly rapidly as expiry approaches. At expiry it is zero.

Call warrants: buying an upside right

Buying a call warrant is a bet on a rising underlying market. The buyer's maximum loss is capped at the premium paid, while the potential gain is theoretically unlimited. The point mort (breakeven) for a call warrant exercised at maturity is: exercise price + premium paid.

Reselling vs exercising: why resale is almost always better before expiry

When the expiry date is still some time away, reselling the warrant in the market is typically more advantageous than exercising it. If the holder exercises early, they realise the intrinsic value — but surrender the time value. If they resell, they capture both the intrinsic value and the remaining time value. At expiry itself, reselling has no advantage (time value = 0); exercising becomes the relevant strategy. Only holders in-the-money at expiry will exercise; all others allow the warrant to expire worthless and lose the premium.

Put warrants: buying a downside right

Buying a put warrant is the opposite strategy: it profits when the underlying falls. A put can serve either as speculative instrument or as a portfolio hedge. If the underlying falls below the exercise price minus the premium, the put buyer is in profit. If the underlying rises, the put buyer does not exercise and loses only the premium — while the portfolio they are hedging will have gained value in equal measure.

Trading mechanics on Euronext

Warrants trade at spot (cash) on a specific Euronext segment, with J+2 settlement. They are traded continuously, with a pre-opening and pre-closing auction to determine opening and closing prices. Liquidity is maintained by contrats d'animation — agreements with the principal warrant issuers requiring them to continuously quote bid and ask prices and stand as counterparty at those prices. No special account is required — orders are placed through the investor's existing financial intermediary. Given the speed at which warrant prices move, limit orders are recommended.

For deliverable warrants (on equities or equity baskets), the issuer may settle by delivering or taking delivery of the underlying at the strike price, or by paying the cash difference between the strike and the market price at exercise. For non-deliverable underlyings (indices, currencies, rates), cash settlement of the price difference is always the rule.

Warrant Taxation: Three Outcomes, Three Calculations

Gains realised on the closure or sale of warrants by natural persons acting on an occasional basis are taxable under the French securities capital gains regime. The PFU applies at the combined rate of 30% (12.8% income tax + 17.2% social charges), or the global progressive scale if the taxpayer has elected it for the year. No duration abatement applies — the holding period is irrelevant.

Outcome 1 — Warrant resold before expiry

Gain (or loss) = resale price − premium paid at purchase.

Outcome 2 — Warrant exercised

For a call warrant: gain (or loss) = market price of the underlying at the exercise date − strike price − premium paid.

For a put warrant: gain (or loss) = strike price − market price of the underlying at the exercise date − premium paid.

The relevant market price is the opening price on the day of exercise.

Outcome 3 — Warrant abandoned (expires unexercised)

The warrant is neither resold nor exercised before expiry. Loss = full premium paid.

Where multiple warrants with identical characteristics (same underlying, same strike, same expiry) have been purchased at different prices, the gain or loss is calculated on the weighted average purchase price across all acquisitions.

Deductible costs. Documented transaction costs — brokerage fees (including VAT), account management fees, and similar — are deductible from the taxable gain.

Physical delivery: a second taxable event

Where the exercise of a warrant results in physical delivery of the underlying securities (rather than cash settlement), the gain or loss on the warrant itself — calculated as above — is taxed at the time of exercise. The subsequent sale of the delivered securities creates a separate capital gain event, computed under the ordinary securities capital gains rules. The acquisition price for the delivered securities is the market price of the underlying on the exercise date.

Loss carry-forward

Losses on warrants in a given year can be set against gains of the same nature in the same year, or carried forward for up to ten years. They cannot be set against the taxpayer's general income.

Part Two: Listed Options — How They Work

Definition

A listed option is a standardised contract giving its holder the right — but not the obligation — to buy or sell a specific quantity of an underlying financial instrument at a fixed exercise price, on or before a set date, in exchange for a premium paid at inception. The instruments covered are individual equities, equity or index baskets, and ETF trackers traded on Euronext's dedicated derivatives segment.

Unlike warrants, both the buyer and the seller of an option are counterparties to the same standardised contract. The contract's terms — exercise price, expiry, and quantity — are set by the exchange, not the issuer. Investors may take either the buyer or seller position on a new contract, and may close positions by transacting in the opposite direction. A specific account must be opened with an intermediary before trading options or futures.

The fundamental asymmetry: buyers vs sellers

Options are characterised by a structural asymmetry between the buyer's rights and the seller's obligations:

• The buyer has the right to exercise or not. Their loss is capped at the premium. Their potential gain is theoretically unlimited.
• The seller receives the premium immediately but takes on a firm commitment — the obligation to buy or sell if the buyer chooses to exercise. The seller's gain is capped at the premium received. Their potential loss is theoretically unlimited (for a call seller) or limited to the exercise price minus the premium (for a put seller).

The four elementary strategies

Buy a call — anticipate a rise. Gain = underlying price at exercise − strike − premium (unlimited upside). Loss capped at the premium. Also used to lock in a future purchase price, or to hedge a short position.

Buy a put — anticipate a fall or hedge a long portfolio. Gain grows as the underlying falls below the exercise price minus the premium. Loss capped at the premium paid.

Sell a call — appropriate only when expecting slight price falls or stability. The seller receives the premium immediately but faces potentially unlimited losses if the underlying rises sharply above the strike plus premium. A covered call sell (where the seller already holds the underlying) limits the damage to foregone profit rather than an outright loss.

Sell a put — appropriate when expecting stability or a slight rise. The seller receives the premium but must buy the underlying at the strike if the buyer exercises. If the underlying falls sharply, losses equal the strike minus the premium received. This strategy is relevant only for those comfortable acquiring the underlying at the agreed strike.

Option types and contract structure

Options may be American (exercisable at any time up to expiry), European (exercisable only on the expiry date), or Bermudan (exercisable on several agreed dates). All options on the same underlying with the same maturity range form an option class. Options within the same class with identical direction (buy/sell), strike, expiry, and underlying quantity form an option series.

Closing an option position

An option buyer has three ways to close: exercise (assigning the seller); execute an offsetting opposite transaction before expiry; or abandon (letting the option expire — the buyer loses the full premium).

An option seller has two exit routes: buy back their position before expiry (profit or loss equals the difference between the original premium received and the repurchase premium paid); or be assigned by the buyer (the seller must fulfil their contractual obligation — settle in cash for index options, or buy or deliver the underlying securities by the next trading day for equity options). The premium is retained by the seller regardless of whether the option is exercised. An option seller cannot simply abandon — their position is involuntary until they repurchase or are assigned.

Part Three: Futures — How They Work

Definition

A contrat à terme ferme (futures contract) is a firm, bilateral commitment to buy or sell a given quantity of an underlying financial instrument at a price agreed today, for settlement on a fixed future date. Unlike options, neither party has a right to walk away — both are bound. When the underlying is an index or a basket (and therefore non-deliverable), the contract settles in cash at expiry for the difference between the agreed price and the final settlement price.

Hedging with futures

A futures contract can be used to hedge a securities portfolio against adverse market movements. The principle is to take a symmetric position on the contract opposite to the portfolio's exposure. An investor holding a diversified equity portfolio who fears a market fall can sell an index futures contract whose composition mirrors the portfolio. Any portfolio losses from the index fall are offset by gains on the futures position — and vice versa if the market rises.

Speculating with futures

A futures contract can also be used speculatively — to profit from the price differential between entry and exit. The speculator closes their position by trading a contract of equal nominal value and the same expiry in the opposite direction. The key risk: a futures position can generate losses that exceed the initial margin deposited. If a speculator sells an index futures contract at €40,000 and the index rises 10% to €44,000, the loss of €4,000 exceeds the initial margin of €2,250 deposited.

Coverage: initial margin and daily mark-to-market

Before placing any order on the derivatives market, the investor must post a dépôt de garantie (initial margin) with their intermediary. This margin may be in cash, French government bills (BTF), French government bonds (OAT), US Treasury bills, German Bunds, UK Gilts, equity securities comprising the underlying of listed option contracts, and certain OPC units approved by the clearing house.

For option contracts, no margin call is made on a net buyer position — the buyer's loss is already capped at the premium paid. Margin is required only for net seller positions, calibrated by the clearing house using the most pessimistic scenario of underlying price movement in the next session.

For futures contracts, the margin represents a fraction of the nominal contract value. Positions are marked to market daily — the clearing house determines a daily settlement price from market prices. Any difference between consecutive daily valuations triggers a margin call:

• On opening a position: the call equals the difference between the agreed contract price and that day's settlement price
• During the life of the contract: the call equals the difference between the previous day's settlement price and the current day's

A positive daily difference is credited to the investor's account; a negative difference must be paid before the next session's open. If the investor fails to meet a margin call, the intermediary must liquidate the uncovered position no later than the following trading day. The investor remains liable for any net debit balance resulting from that liquidation. The AMF recommends that occasional operators maintain a margin above the contractual minimum at all times.

Closing a futures position

A futures position may be closed before expiry by entering an opposite transaction in a contract of the same specification; or at expiry through the contract's final settlement at the liquidation price — the arithmetic mean of the index values calculated and published on the expiry date. The profit or loss equals the algebraic sum of all positive and negative margin calls accumulated between the opening and closing of the position.

Trading mechanics and order types

Euronext applies two priority rules: best price first; then time of arrival for orders at the same price. Orders without a price limit are always executed first. Every order must specify: buy or sell; the contract and expiry; whether the order opens a new position or closes an existing one; the quantity; the price conditions; and validity. Two order types are available: à cours limité (with a maximum buy price or minimum sell price) and au marché (no price limit, executed at the best available price). Price condition mentions include exécuté et éliminé (fill or kill the total), tout ou rien (fill completely or cancel), and à quantité minimale (fill at least the minimum specified quantity).

Options and Futures Taxation

Scope: occasional vs habitual operators

The tax regime depends on whether the taxpayer trades occasionally or habitually (CGI Art. 150 ter). Occasional operators — the regime covered here — are taxed at the PFU (12.8% + 17.2% social charges = 30%) or, on global election, the progressive income tax scale, within the securities capital gains category, with no duration abatement. Habitual operators are taxed under the BNC (non-commercial profits) regime (CGI Art. 92, 2-5°) with their gains subject to the progressive scale.

The rules apply regardless of whether the transactions were carried out on French or foreign markets. Operations conducted through an interposed entity subject to the partnership tax regime are taxable pro-rata in the hands of each member, even where profits are not distributed.

Record-keeping obligation

Taxpayers must retain all supporting documents — avis d'opéré and summary statements of open and closed positions — sufficient to justify the profits or losses declared annually. These must be communicated to the tax authority on request.

Futures: taxable event and gain/loss calculation

For futures contracts, the taxable event is the definitive closing of the position — whether by offsetting transaction, liquidation at expiry, or forced liquidation by the broker in case of default. Where a position covers multiple contracts closed by successive partial closings, the taxable event arises at each partial closing date.

The gain or loss on each contract equals the algebraic sum of all margin payments received and paid between the contract's opening and its final closing — that is, the total of all positive and negative daily mark-to-market settlements accumulated over the life of the position.

Deductible costs: documented clearing house commissions and brokerage fees (all inclusive of VAT) are deductible from the taxable gain. Futures losses may be set against futures gains in the same year or in any of the ten following years. They cannot be set against general income.

Options: taxable event and gain/loss calculation

For listed options, the taxable event arises in the year in which the option is sold, exercised, or expires. The gain or loss is determined as follows:

When the option is bought back or resold before expiry: gain (or loss) = difference between the premium received (resale) and the premium paid (original purchase).

When the option is abandoned: the buyer realises a loss equal to the full premium paid; the seller realises a gain equal to the full premium received.

When the option is exercised, the gain or loss for each party is:

Where an investor has acquired multiple options in the same series at different prices, the premium used in the gain/loss calculation is the weighted average purchase or sale price across all acquisitions in that series. Deductible costs: documented clearing house commissions and brokerage fees are deductible. Option losses may be set against option gains in the same year or the ten following years. They cannot be set against general income.

Physical delivery: the two separate events

Where an option or warrant settles by physical delivery of securities (rather than cash), the derivative gain or loss is taxed as above. The subsequent disposal of the physically delivered securities is then a separate and independent capital gain event. For the purpose of computing that capital gain:

• A put buyer who exercises, or a call seller who is assigned, is treated as having sold the delivered securities at the market price on the exercise/assignment date
• A call buyer who exercises, or a put seller who is assigned, is treated as having acquired the delivered securities at the market price on the exercise/assignment date — this becomes their acquisition cost for any subsequent disposal

Succession: valuation of open positions at death

Where the holder of options or futures contracts dies, the inheritance tax owed by heirs or legatees is calculated on the lower of two values: the average of the highest and lowest prices on the day of death, or the average of the last thirty prices preceding the date of death (CGI Art. 759).

This article is provided for general information and educational purposes only. It does not constitute tax or investment advice. The tax rules described here apply to natural persons domiciled in France acting on an occasional basis. The distinction between occasional and habitual operator status is a question of fact; habitual operators are subject to the BNC regime with different loss carry-forward rules. Investors with complex derivative positions, cross-border accounts, or positions at death should seek advice from a qualified French tax adviser or lawyer (avocat). References are correct to the best of the author's knowledge as of the date of publication.