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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 started 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 commodities, stock, etc., at a certain price on or before a predetermined date. Two primary types of options are call and put options.
Read Also: Simple Answer about Options Trading: Halal or Haram?
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 asset 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?
There are several factors that make convetional options impermissible, including the existence of speculative elements: gharar and maysir.
Gharar
Gharar in Arabic is associated with uncertainty, deception and risk. Technically, it is “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 buys call or put option, there is no certainty about whether the asset price will reach the strike price or not.
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 a form of game of chance or gabling is considered to involve maysir. Furthermore, in options trading, gain of one party results in loss to the other.
Premiums
Options trading in the stock market is subject to collecting fees called “premiums” for promises that are not permissible under Sharia law. This ruling applies to both call and puts options. Therefore, Muslims are strongly advised to stay away from options trading.
Why do some investors prefer options over stocks or bonds?
The main reason behind people’s preference for this security is lower cost. In this type of security, you can take control of the same number of shares with much less money. Another reason is the likelihood of greater potential gains through intelligent math of leverage.
However, options trading may be overwhelming unless you consider the following risks it has:
- Complexity. Traders believe that options are more complex than other traditional investments such as stocks.
- Time. You must be careful at timing since this type of securities can expire.
- Leverage. This can be both risky and advantageous. Leverage can hurt and help.
Note: Conventional option trading is not permissible for Muslims.
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