Options trading has gained popularity among traders because it seems to be a lucrative method to gain exposure to assets and commodities. However, Muslim investors may be wondering if it is halal or not. In the following article, we will discuss more about what options trading is and if options trading is halal.
What is options trading?
An option is a contract between a buyer and seller on particular securities, giving the buyer the right to buy or sell the underlying asset at a predetermined price on or before the agreed date. Moreover, this security is a type of derivative as it derives its value from an underlying asset. Options trading starts in the 1970s. The main objective of options is to allow investors to bet on the future prices of assets, but as we’ll see later, their applications have grown dramatically.
An option allows you the right but not the obligation to buy or sell security such as assets, stock, etc., at a certain price on or before a predetermined date. The two most common terms in options trading are: call and put options.
Call options
A call option is a contract allowing its holder to buy the security. It is a contract that offers the owner the choice, but not the obligation, to buy a certain underlying asset at a fixed price (referred to as the “strike price”) within a specified period (referred to as the “expiration”).
The call buyer pays the call seller a “premium” per share for this option to buy the stock. Each contract typically represents 100 shares of the underlying stock. Investors do not need to own the underlying asset to purchase or sell a call.
Suppose someone purchases a call option to buy a certain commodity at $50 per barrel. If a barrel’s price rises to $65, he can still buy the barrel at $50 or sell the contract for a profit. If the price falls below $50, the buyer can simply let the contract expire.
Put options
A put option is a contract that offers the owner the choice, but not the obligation, to sell a certain underlying stock at a fixed price (referred to as the “strike price”) within a specified period (referred to as the “expiration”).
For instance, oil is currently priced at $55 per barrel, and an oil-selling business has a put option to sell the commodity for $45 per barrel. This allows them to sell oil barrels for $45 regardless of the market price falling below $45.
Options trading Halal or Haram?
Options trading Halal or Haram? According to Shariah laws, options are impermissible. There are several reasons for that, including the existence of speculative elements, gharar and maysir.
Gharar
Gharar literally means risk. Technically, it is something for which the probability of getting it and not getting it are about the same, “something whose acquisition is uncertain and its true nature and quantity is unknown” (Mu’jam ISRA, 2010: 131). Options trading has the gharar element because the nature of the trade has excessive uncertainty. When someone calls or puts an option, the probability to get the strike price is highly uncertain.
Maysir
Options trading has characteristics of Maysir (gambling). According to Qur’an 5:90-91 and 2:219, maysir is impermissible. A transaction that is risky or incorporates an element of speculation or uncertainty is maysir. Furthermore, the activity requires no benefit to the participants.
Is there halal option?
According to a fatwa issued by Mufti Taqi Usmani, trading options can be halal under specific conditions.
An option, according to Sharia rules, is a commitment to sell or buy something at a specific price within a specific time frame. A promise like this is ethically binding, but you can’t place a price on it and can’t sell or buy it (the option).
Mufti Taqi Usmani commented that; for stock options to be halal, the promiser (seller of the option) cannot charge a fee to the promisee (the buyer of the option) for the promise (option).
Options trading in the stock market is subject to collecting fees for promises that are not permissible under Sharia law. The concept of collecting the premium fee itself is inevitable and violates the Shariah rulings. This ruling applies to both call and puts options. Therefore Muslims are strongly advised to stay away from options trading.
To read more about Islamic Finance related topics, please click here and visit our academy.
Feel free to sign up for our free stock screening services at Musaffa.com