What is Binary Option? Investment and Islamic Perspective

In early 2022, there is hype in South Asia, particularly Indonesia, and people are curious about the binary option whether it is a good investment and how Islamic it is. Problematic news on binary options has appeared in the Indonesian market, causing billions of rupiah losses from its player.

People are tempted to get rich in a simple way and a very lucrative opportunity to play in the money market. The early player of the binary options showed off their luxurious lifestyles and attracted people to be like them. The issue arises when binary options users have profited from the transaction but cannot withdraw their money from the platform. Eventually, people start questioning the essence of binary options and how this case happens. This article will follow up the brief story of the massive common misleading practice of financial literacy education that spread extensively in Indonesia and ASEAN in general about binary option online transactions.


What is binary option?

Binary options are a sort of fixed-reward option in which you must guess the outcome of two possible outcomes. You receive the agreed-upon reward if your forecast is true. If you do not, you lose only your initial stake. The term ‘binary’ refers to the fact that there are only two possible outcomes — win or loss. To illustrate how it works, here is a brief explanation of the mechanism of binary options.

Binary options have an expiration date and/or time associated with them. For the trader to profit at expiration, the underlying asset’s price must be on the correct side of the strike price (depending on the trade taken). When a binary option expires, automatic credit and debit on the trader’s account will occur associated with the trade’s profit or loss. This means that the buyer of a binary option will either receive a payout or lose their entire investment. There is no in-between. In contrast, the option seller will either retain the buyer’s premium or be compelled to make the whole payout.

For instance, there is a prediction from the market that the share price of ABC will be greater than $25 at 10:45 a.m. on February 22, 2022. The trader chooses yes (the price will be higher) or no (it will be lower). Assume the trader believes the price will trade higher than $25 on time. He is willing to risk $100 on the trade. If ABC shares trade over $25 at that time and date, the trader receives the agreed-upon payoff. If the payoff percentage is 70%, for example, the binary broker credits the trader’s account with $70. Conversely, if the price trades below $25 at that time and date, the trader is incorrect and loses their $100 investment.

Is it the same as the option contract?

Binary option has other terms such as all-or-nothing and digital options (which are more common in forex/interest rate markets). It also has another name of fixed return options (FROs) on the American Stock Exchange. Binary options are fundamentally different from more typical options. In contrast to other types of options, a binary option does not entitle the holder to buy or sell the underlying asset. When the binary option expires, the holder will receive either the specified amount of cash or nothing. Meanwhile, in conventional option contracts, an underlying asset derives the price determinant of the options contract. With an option contract, holders can transfer the ownership of the underlying assets to other parties. Moreover, there are only two positions in binary options: buy or sell. Conversely, in an option contract, there are four positions: long-put, short-call, long-call, and short-put.

Investment perspective on binary option

This section provides an investment perspective on the binary options before we proceed to the Islamic perspective. In fact, different jurisdictions have different policies on binary options. The Securities and Exchange Commission (SEC) of the United States strictly regulates the operation of binary options to protect its user from scams or involvement in unlawful activities, such as money laundering. However, Some binary options trading platforms may also operate as unregistered securities exchanges. In that case, the number of binary options trading platforms may double as unregistered securities exchanges. This would be the case if they knew non-discretionary methods to match orders in securities from numerous buyers and sellers. However, there are several circumstances in which a registered broker-dealer with a trading system or platform is not mandatory to register as an exchange.

SEC imposes that “It is illegal for entities to solicit, accept offers, offer to or enter into commodity options transactions (for example, foreign currencies, metals such as gold and silver, and agricultural products such as wheat or corn) with U.S. citizens unless those options transactions are conducted on a designated contract market, an exempt board of trade, or a bona fide foreign board of trade, or are conducted with U.S. customers who have a net worth that exceeds $5 million.” This clause indicates that the binary option can be considered an investment as long as it complies with jurisdiction law in a rigid manner.

Islamic Perspective on binary option

As we can see from the above explanation, the binary option is not real trading, although it is named “trading” activity. There is no real transfer of ownership from the seller to the buyer. Also, price exchange to compensate product or service does not occur in binary options. We can see the substantial distinction between binary options and transactions in the stock exchange, where the real sale does exist even though market prices fluctuate. Transfer of ownership from previous to new shareholders is evident in the stock market.

Hence, a binary option is just a betting activity in which a zero-sum game exists; a winner takes advantage of others who suffer loss. From the Islamic perspective, gambling (qimar) exists in this transaction. Therefore, the binary option is haram (not shariah-compliant). More importantly, in some jurisdictions, especially in Indonesia, the binary option becomes a scam when users cannot withdraw their balance from accounts. In this sense, not only disobedient to Islamic law but the binary option also brings adverse impacts on society in ethical manners.

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