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I live in North America and work for a IT company. Alhamdulillah I make quite a bit of good living with little or no saving. A friend of mine who is or seems to be a good practising muslim, introduced me to STOCK OPTIONS, basically I studied 300pages book to understand how it works. Now when I am at the Urge of starting an account and start working on CALL, PUT, PURCHASE of stocks, Before that I felt I should refer more on it because I really dont want to earn any haram living. I know the basics of chosing the right investment(i.e. No riba, check for the equity source of earning(no banks, insurances etc). If people of knowledge throw some light on this on the basis of QURAN and AHADEETH. Looking for unambigious answers. I also have intention(neeyat) to give 20% for charity on all my stock earnings.

May Allah(swt) bless your efforts!!

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    using common sense i can say trading stock future/options is a pure speculation and nothing else hence , i think you should keep away from this. – Zia Sep 11 '13 at 15:14
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    I'll be more than surprised if you can find stock dealings with no banks and no riba. – itsols Sep 23 '13 at 13:14

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A call option involves purchasing the right (but not the obligation) to purchase later an amount of stock at a fixed price. Fundamentally, this makes the transaction different from futures which are [discouraged|forbidden] because of the general prohibition against selling one obligation for another obligation (e.g. a debt for a debt).

Unlike a futures contract, a call option does not involve any debt on the buyer's part; he is under no obligation to buy anything. The only debt involved is on the seller, as she has to agree to the sale if the buyer chooses to go through with it.

Fundamentally, this is analogous to providing a down payment toward a future purchase (with the down payment treated as part of the final price if the sale goes through, forfeited if it does not). There is some disagreement whether such transactions are halal, but the Hanbali position is that it's permissible, citing a report that Umar himself partook in such a transaction.

A number of Islamic financial institutions have thus permitted the use of such contracts (termed 'arbun), however their use is still controversial. Even if considered permissible, there are caveats which should be considered:

  • The contract should be fixed at the time the option is contracted, not only in price and number of shares but also in length of time, to prevent uncertainty.
  • The stock involved must exist at the time the option is contracted until the time it is redeemed/expired, to prevent selling what one does not possess.
  • This should not be done for currencies (e.g. FX options); I don't know if buying the right to buy future money for future money with current money is haram per se, but it's a whole extra level of complexity that I really don't feel like getting into with this answer.

Also note that this is only regarding call options. Put options, which is to say purchasing the right to sell instead of buy stock, are a different beast altogether; there are shari'ah-compliant vehicles which can be (and have been) used to emulate put options to a point, but they not quite as close a fit as 'arbun is to call options. I would argue that puts should be just as permissible as calls since they're effectively the same thing in reverse, but that's just a personal opinion and not backed by any actual evidence.

Also note that this permissibility is entirely in the context of a market that meets Islamic ideals. Of particular concern, if in the non-Islamic options market the contracted stock does not exist at the beginning of and during the period of the contract (i.e. the stocks were short-sold) then the whole transaction basically becomes pure gambling. As always, you should investigate any potential investment thoroughly before actually investing.

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Ibn Omar reported: They (people) used to purchase food-grain in a place confronting the market and sell it also in its place. Then the Holy Prophet forbade them to sell it in its place till they take it in possession.

-(Abu Daud)

Ibn Abbas reported: As for that of which the Holy Prophet prohibited sale, it is food-crops till they come in possession. Ibn Abbas said: I don’t consider anything but just like it.

-(Bukhari and Muslim)

I don't have sufficient knowledge about Stock options but if money is taken before possession of goods sold is forbidden in Islam as it's clear from above Ahadis. Can't say more because you know better the nature of your business.

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Well, I believe writing a call option (i.e. providing another the right to purchase your shares) is just like a limit order where you are receiving a down payment towards the eventual purchase of the shares that you OWN. Writing a naked call (i.e. on stocks that you do not OWN) is speculation but writing call options on shares that are in your possession is just like receiving down payment towards the purchase of shares of stocks that you own. If the buyer of the call option does not wish to purchase your shares, upon expiration, you get to keep your shares and the down payment amount. If the buyer of the call option exercises his right to acquire YOUR shares, you have a sale of your stock and you still get to keep the amount you got when writing the call option.

Writing a CASH COVERED PUT also, I believe, should be, by the same token allowed because you have essentially placed a limit order to buy shares of a particular security at an agreed price over an agreed duration and set aside adequate cash to cover the purchase. In the event, the buyer of the put option doesn't wish to sell his shares to you, you get to keep the amount that he's paid to you for writing the put option.

What are your thoughts based upon the above?

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I have been trading option for almost 10 years now and gone thru: this in details whether it is Halal or not. Unfortunately, none of the Islamic scholars are unable to give me the accurate and correct answer. The reason is most of them have a little knowledge or no knowledge about these financial products. FX (Foreign Exchange) does not fall in line with the teaching of the Messenger. Because when you trade FX you must have or must use the Margin. Margin means broker will allow you to trade more than your capitals and they charge interest on the Margin money which they borrowed you.

when coming to the Option, which is a totally different concept. Most of the brokers (whether online or offline) brokers or platforms do not allow you to use the Margin and if you put in $10,000, you use your $10,000 to trade option and since Margin is not involved, you can stay away from the interest (Reba)issue. Secondly, the concept of an option is, as mentioned in above email trails, it is not a speculative and you need to understand the stock (the Company) which you are buying and its fundamental and technical behaviors and totally different from buying the lottery ticket. Buying lottery ticket is, you don't need to study anything and totally based on the luck which is prohibited in Islam. But Option is not based on that concept. in Summary, Option is not involved with interest, Reba, and option concept is based on obligation and not a promise. Therefore I presume Halal for the trading option. But Allah knows the best.

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Any system involving banks transacting is haram , in the absence of a gold backed financial system. Money is defined as gold or silver dinar and dhiram. In essence hard to avoid due to gold standard being removed with unbanked paper currency. But to profit on options is clear speculation with assistance of banking system makes it clear in my opinion it would be leaning on haram , but only my opinion .

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    Try adding refrences to your arguments – Seeker Mar 16 '17 at 4:27
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Options do serve the purpose of hedging or insurance, which is a good thing for society as a whole. But more than hedging stocks that one has in delivery, it is used as a money making game in & of itself and secondly options is more of a zero sum game where money is simply transferred from one person to another. Islamically, that is the main concern as one person always has to lose for the other to win, which is not the case in a normal business transaction that is Islamic. I'm no expert, learnt options over a year and now I'm stuck, looking for a solution.

Since interest is involved in option Greeks in the form of rho, there are 3 articles below regarding bank interest. Secondly, insurance is thought to be unislamic by some because the companies that offer insurance may also be involved in interest.

https://www.dawn.com/news/1003141/bank-interest-is-not-riba

https://www.sukuk.com/education/al-azhar-university-fatwa-interest-bank-deposits-271/

https://www.dawn.com/news/print/586636

. Allah knows best

  • Welcome to Islam SE. Answers should be elaborate and focused on addressing the question. Claims should be supported by evidence. Please visit our tour in the help center, and refer to How to Answer. – III-AK-III Apr 14 '18 at 20:46
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Lets analyse put option it means the buyer of put option gets the right to sell his say 100shares to the seller at a predetermined price/strike price upon payment of premium for a period. Now why would the buyer of contract pays a premium to seller?Its so that buyer has got right/he has insured himself that he got a right to sell his shares at a predetermined price and if it doesnt reach that price the option is not worth and expires and he loses the premium paid. Now the seller of option acts as an insurer and had got the premium and gets to keep that premium if it expires without reaching below the strike price and thats his motive and its not that to buy a sinking share, for more than market value(i mean he could buy the share low or whatever price from the equity market whyfrom options) So its Like a insurance contract where the premium is paid for a certain period and company gets to keep the premium if nothing happens Lets conclude that the Put option is Haraam

Lets analyse the call option now It means the buyer of call option gets a right to buy say 100 shares from the seller by paying a premium so that he could buy it for a predetermined price/strike price say 100CE(100rs) even if it goes so much above the strike price. Now lets analyse in the first place why would the seller of option ensure the buyer of the option that he would sell the shares only if it goes above the strike price,its actually a loss or risk for the seller and no man with asound mind would do that, its because the seller is betting against it that the share would not reach the strike price beacause if doesnt within the expiry he gets to keep the premium amount or he has unlimited risk of loss if its exercised Now what kind of contract is that, Ok now the final point why would the buyer of call option do that,there is two motive no.1 as usual he's expecting the share to go above so that he could get it for less than market price no.2 the premium amount he paid is so much less than the actual value of the share and he could only lose so little if the doesnt go above the strike price(kind of insuring himself) Lets conclude that the Call option is Haraam as it involves Betting,Nature of insurance,

So hereby i conclude that the OPTION IS HARAAAM!!!!!!

  • I don't think anyone is going to read this answer: (a) it's wordy and too tedious to bother reading, and (b) there's no Islamic evidence cited---from the reader's perspective, it's just some random person on the Internet writing stuff (what if next some random person on the Internet wrote the complete opposite?). – Rebecca J. Stones May 16 at 17:36
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Salaam,

I feel OPTIONS is not accepted at all as its pure speculation and price is not on object or some goods. Its just a number and you don't have anything in possession.

FUTURES on a particular stock [ not on INDEX ] is still accepted to some extent as you are bidding on market price [ though you may not be paying full price of it ] and your strength of speculation and study on that particular stock where it may reach in coming days or time.

But again as you are not buying it by paying full cost, FUTURES also looks not halaal as its a gamble and mostly people are gonna be ruined as big sharks most of the time play the tricks.

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    Hi. This answer needs more explanations and proofs. Please try to edit and improve. Answers that don't give sufficient explanations might get removed. – user44 May 15 '14 at 11:55
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Options Strike price if not met. Result is zero $. Options used as insurance, insurance also haram. All or none is always haram in Islam. Exactly as After purchasing lottery ticket win it all or loose it all is gambling. And options is exactly that. Stay away from haram earning does not matter if you are in IT or not.

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AOA, options (call or put) have component of interst rate added. How options are priced?..there are 5 components i.e. delta, vega (volatility), theta (tome before expiration), rho (based on interest rate).

Interest is forbidden by ALLAH. ALLAH says HE will go to war with people who deal with interest. ALLAH forgive me if I am misquoting).

Google seach for: rho in stock options. In order to find out more.

Basically if one buys stock option they pay price for interest as well as rho listed above ? One drop of urine drop into glass of water will make glass of water undrinkable. Rho interest rate even small...will contiminate entire stock earning?

Is stock options halal? Or I am missing something.

P.s: I am not expert, just like to know myself if stock options are halal or haram. But above point if taken in that context just nulls everything about stock options since one pays for interst rate added into purchase of stock options by default. Making stock options as not valid for Muslims because of interst.

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