The current “woke” generation wants to make money online – which is one of the best ways to attain financial freedom. But for Muslims, are these methods of making money halal? Today, we’ll be talking about one of the several categories of trading – Options trading. Then, we’ll shed light on the dilemma of whether options trading is halal or not.
Let’s go!!!
Options trading is one of the hottest topics in the world of finance. Investors purchase options because it gives them the option (not an obligation) to buy or sell a stock at a predetermined price and time. This type of investment has concerned Muslim investors as it contains elements of gharar, also known as gambling.
Before we dive into what Islamic scholars had to say about the options, let’s understand what options are and how they work:
What are Options?
An option is a financial contract that allows you (the investor) to purchase a stock or any other asset at a predetermined price before the option expires. It’s a way for investors to make sure they can buy an asset at a lower cost in the future, even if prices rise.
However, if the price of the stock falls, it makes the option useless, and the money spent to buy the option is lost.
Options allow you to hedge your investments. Upon buying an option, you can buy an asset or sell an asset at a predetermined price. So, if the stocks decline, you can simply avoid by using the option to buy stock and save yourself from a bigger loss.
Types of Options Trading
- Call Option
A call option is a contract that gives the bearer the option (not an obligation) to buy a certain quantity of shares within a predetermined amount of time. On average, call options expire in ninety days, and the bearer can purchase shares within those days. The price at which the buyer can buy the share through exercising their right to use the option is called the Strike Price.
Buyers can buy but are not obliged to buy shares or assets, however the seller is obliged to sell them if the buyer demands to buy them. In a call option, the seller receives a premium when he enters the contract. Buyers benefit from purchasing the stocks in the future when their price goes up.
2. Put Option
A put option is a contract in which the bearer of the shares or assets has the option (not obligation) to sell them at a predetermined price within the specified period. The period is usually three months or 90 days long, after which the put option expires. The predetermined price at which the seller can sell is called the Strike Price.
The buyer is obligated to buy the shares even if the buyer would incur a loss in purchasing the shares. After the specified period ends and the seller doesn’t sell, the agreement expires.
Fatwas on If Options Trading is Halal
In an option, the contract sells only the option, not the shares. Because an asset does not back the contract, it is something intangible and highly risky. The contract restricts the buyer or the seller to buy or sell. One of them must suffer from the loss for the other to benefit.
Such types of contracts in which one person benefits while the other suffers a loss are not permissible in Islam. In Islam, the financial contract should be based on mutual benefit and the greater good. The option agreement is ambiguous and resembles gambling (known as gharar), which is haram.
Several Fatwas from world-acclaimed scholars deem the option contracts as impermissible. Here is what some Shariah scholars and the Islamic council had to say about Options:
International Islamic Fiqh Academy-OIC
The resolution of the International Islamic Fiqh Academy, Number 63 (1/7), stated that:
Option Contracts (known as options in global financial markets) are novel financial contracts that cannot be termed Sharia contracts in any way.
In an option, the object of the contract is not a benefit, a specified item, or a financial right on an asset that can be compensated. Such types of contracts are impermissible in Islam.
1. Zakir Naik
An international Dawah scholar, Dr. Zakir Naik, deemed options and futures haram during a live Questions & Answers session. He explained that some types of contracts for buying real estate might be halal, where an individual buys a certain portion of the property. But with shares, you do not possess the stocks in your hands.
2. Saami ibn Ibraaheem as-Suwaylim
Dr. Saami ibn Ibraaheem as-Suwaylim gave a Fatwa that option contracts, whether call or put options trading in the global financial markets come under the heading of ambiguous contracts. Such contracts that are ambiguous are prohibited under Islamic teachings. So, options trading is halal or haram?
3. Yasir Qadhi
Dr. Yasir Qadhi, an American Theologian, said that in an option, two people are gambling against each other. One party hopes that the price goes up, while the other hopes that the price goes down. He further added that because options are very similar to betting, the Fiqh Academy Council-OIC, European Fatwa Council, Accounting and Auditing Organization for Islamic Financial Institutions AOOIFI, and several other scholars have ruled options to be impermissible in Islam.
4. Mufti Taqi Usmani
Mufti Taqi Usmani, the president of the Wifaq ul Madaris Al-Arabia, deemed options as impermissible because an option is not something tangible or backed by anything tangible that can be bought or sold as per Shariah laws. Secondly, the transaction resembles Gharar or Qimar (gambling), which is haram in Islam. Thirdly, the derivatives negatively impact the economy.
Options Trading Is Halal or Haram?
Islamic scholars from around the world don’t agree that Option trading is halal. Islam promotes fairness and mutual gain in investing and financial transactions, so this trading is said to be haram. Even though it’s used to hedge the risk, it’s a very risky investment itself because it resembles gambling, where one party benefits while the other suffers a loss.
Option contracts always result in a loss for one party and a gain for the other, which is against the idea of social justice in Islam.So, we can’t say options trading is halal.
What are Derivatives?
A derivative is a contract or agreement that derives its value from an asset, index, or interest rate. There are four major derivatives: options, futures, swaps, and forwards. Three derivatives other than options are explained below:
Futures
Futures are standardized contracts that obligate the buyer or the seller of an asset to sell or buy at a pre-agreed price and on the specified date. Unlike options where the buyer or seller has the option to buy or sell, in a futures contract, it is a must to do so.
Futures are traded on a stock exchange, and the market determines the prices of futures every day. Because the markets are constantly changing, the future expectations of shares change. This is why the price of Futures is adjusted keeping in mind their expiration date.
Forwards
Forwards are future contracts that obligate the bearer of the forward to perform whatever they have agreed to. Unlike Futures, Forwards are non-standard and customizable, meaning that they are not traded on stock exchanges, and any two parties can create their forward contract.
Forwards are not marked-to-market, meaning that their prices are not adjusted according to changing market conditions. They are available over the counter and can be customized according to the terms and conditions of the buyer and seller.
Swaps
Swaps allow two parties to exchange financial obligations through a series of payments. There is no exchange of principal or asset but a notional principal. There can be an exchange of liabilities or cash flow that is based on a rate of interest.
In a cash flow exchange, one cash flow is based on floating interest rates, and the other is generally based on the fixed interest rate. Interest rate swaps are more common than any other type of swap.
Swaps are not traded on stock exchanges. They are sold over the counter and can be customized according to the demand of the parties involved.
Are Financial Derivatives Halal?
Most Islamic scholars believe that financial derivatives are haram. This is because they have elements of gambling, riba (interest), and speculation (gharar) that are impermissible in Islam.
Gambling: derivatives are haram because one party profits while the other suffers a loss.
Interest: Interest is haram, and eating of interest is one of the biggest sins in Islam. Some derivatives involve interest; therefore, holding and trading such derivatives is haram in Islam.
Speculation: The contracts do not directly exchange assets; such financial transactions are risky and hence prohibited in Islam.
Conclusion
Muslims should only invest in ventures that are Shariah-compliant. Any transaction that involves excessive risk interest or is similar to gambling is haram. This article shed light into whether options trading is halal or haram. Also, investing in any business venture that promotes forbidden items, such as alcohol, pork, etc., is forbidden.
Muslims should refrain from activities that spread evil in society or harm the other parties involved in a financial transaction in any way.
As an expert in Islamic finance and investment, I bring a wealth of knowledge and understanding about the principles of Shariah-compliant financial transactions. My expertise is grounded in both theoretical understanding and practical application, having closely followed the discussions and rulings of renowned Islamic scholars on various financial instruments. Now, let's delve into the concepts mentioned in the article:
Options Trading:
Definition: Options trading involves financial contracts that grant the investor the right, but not the obligation, to buy or sell an asset at a predetermined price and time.
Concerns for Muslims: Muslim investors are cautious due to the presence of "gharar," an element resembling gambling, as options don't involve the direct exchange of tangible assets.
Types of Options Trading:
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Call Option:
- Gives the right to buy shares at a predetermined price.
- Seller receives a premium.
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Put Option:
- Gives the right to sell shares at a predetermined price.
- Buyer is obligated to buy shares.
Islamic Perspective (Fatwas):
-
International Islamic Fiqh Academy-OIC:
- Options contracts termed impermissible as they lack a tangible, compensatable object.
-
Zakir Naik:
- Options and futures deemed haram due to lack of possession of tangible stocks.
-
Saami ibn Ibraaheem as-Suwaylim:
- Options trading considered ambiguous and prohibited under Islamic teachings.
-
Yasir Qadhi:
- Likens options to gambling, ruling them impermissible in Islam.
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Mufti Taqi Usmani:
- Deems options impermissible, citing lack of tangibility and resemblance to gambling.
Conclusion: Islamic scholars worldwide generally agree that options trading is not halal due to its resemblance to gambling and the inherent risk, where one party's gain results in another's loss, conflicting with principles of mutual benefit.
Derivatives:
Definition: Derivatives are contracts deriving value from an underlying asset, index, or interest rate. Four major types are options, futures, swaps, and forwards.
Other Derivatives:
-
Futures:
- Obligates buyer/seller to buy/sell an asset at a pre-agreed price.
- Traded on stock exchanges.
-
Forwards:
- Non-standard, customizable future contracts.
- Not traded on stock exchanges.
-
Swaps:
- Exchange financial obligations through payments.
- No exchange of principal; based on a notional principal.
Islamic Perspective on Derivatives:
-
Gambling:
- Derivatives considered haram due to profit for one party and loss for another.
-
Interest (Riba):
- Some derivatives involve interest, making them impermissible.
-
Speculation (Gharar):
- Financial transactions without direct asset exchange are considered risky and prohibited.
Conclusion: Most Islamic scholars agree that financial derivatives, including options, are haram due to elements of gambling, interest, and speculative risk.
General Investment Principles:
Shariah-Compliant Investing:
- Investments should adhere to principles of fairness, mutual benefit, and the greater good.
- Activities promoting forbidden items, such as alcohol or pork, are forbidden.
Conclusion: Muslims are encouraged to invest in ventures that comply with Shariah principles, avoiding excessive risk, interest, or any activities resembling gambling.
In conclusion, options trading and certain derivatives are generally considered haram by Islamic scholars due to their inherent risk and resemblance to gambling, contradicting Islamic principles of fairness and mutual benefit in financial transactions. Investors are advised to seek Shariah-compliant alternatives for their financial endeavors.
