Are Options Haram in Islam?


Money
Photo Courtesy: Rob Smits

The world of finance is full of things that we don’t understand well enough to know whether they are allowed by Sharia. Many Muslims wonder whether options are haram in Islam.

Options (stocks, assets, etc) are considered haram as they are based on ambiguity and speculation. Islam insists upon mutual benefit and in options trading, one entity benefits at the expense of the other party.

In this article, we will discuss whether options are haram in Islam and share fatwas by various religious scholars on the subject.

Table of Contents:

1. What is Options Trading?
2. Are Options Haram?
3. When are Options Halal?
4. Are Binary Options Haram?
5. Are Stock Options Considered Gambling?
6. Fatwas about Stock Options

What is Options Trading?

An option is a contract that gives you the right but not an obligation to buy or sell a security (asset, stock, etc) on or before a previously agreed-upon date at a previously agreed-upon price. There are generally two types of options, call options and put options (source).

Call Options

A call option is a contract that gives the holder the right (but not obligation) to buy a security at a particular price within a particular time period. Call options are used by the buyer to hedge risks or speculate prices. 

For example, someone buys a call option to purchase oil at $65 per barrel. Now, if the barrel prices rise above $65, they can still buy the barrel at $65 or sell the contract at profit.

Whereas, if the price remains below $65, they can simply let the contract expire.

Put Options

A put option is a financial contract that gives the holder the right (but not an obligation) to sell a security at a particular price within a particular time period. Put options are used by the seller to hedge risk or to speculate prices. 

For example, currently, the oil is trading at $55 per barrel, and the oil-selling corporation has a put option to sell oil for $45 per barrel. This gives them the right to sell oil barrels for $45 even if the market rates fall below $45.

Are Options Haram?

Yes, stock options are considered haram. Stock options involve both speculation and risk, which makes it Maysir. Maysir is defined as a transaction that is risky or involves an element of speculation or uncertainty. Also, the participants are not gaining anything useful from the activity. 

In Quran Chapter 7 Surah Al-Maidah verse 90-91, Allah SWT says:

O you who have believed, indeed, intoxicants, gambling, [sacrificing on] stone altars [to other than Allah], and divining arrows are but defilement from the work of Satan, so avoid it that you may be successful. Satan only wants to cause between you animosity and hatred through intoxicants and gambling and to avert you from the remembrance of Allah and from prayer. So will you not desist?

Al-Quran Surah Al-Maida (source)

Unlike stocks, options are derivatives, and they derive their value from the price of the underlying object. In the options contract, the risk of owning the contract didn’t exist when it was written.

On the other hand, stock options are derivates and there’s no limit to the risk they can generate. Due to the unlimited risk, Warren Buffet referred to derivates as “financial weapons of mass destruction”. (source)

When are Options Halal?

According to a fatwa by Mufti Taqi Usmani, options trading can be halal on certain conditions.

The principles of Sharia state that an option is a promise to sell or purchase at a particular price within a certain time period. Such a promise is morally binding, but you cannot put a price on the promise itself or you cannot sell or purchase the promise (or the option).

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). 

In the stock market, options trading is based on charging fees on promises, which are not valid according to the rules of Sharia. This is irrelevant to the subject matter of the sale i.e. a commodity, gold, silver, or currency since the contract is invalid from the beginning.

This ruling is valid for both put and call options. 

Learn more about whether gold is haram or not and the Islamic ruling on taking out loans in gold.

Are Binary Options Haram?

A binary option is an exotic financial option where the outcome is either a fixed monetary amount or nothing.

Since trading in binary options involves an element of speculation, risk, and interest (riba), they are considered haram in Islam.

Muslims cannot get involved in a transaction based on interest. Allah says in the Holy Quran:

O believers, take not doubled and redoubled interest and fear God so that you may prosper. Fear the fire which has been prepared for those who reject faith, and obey God and the Prophet so that you may receive mercy.

Al-Quran Surah Al-Imran verse 130-2 (source)

Involving an element of risk and speculation makes binary trading Gharar, which is also haram. Allah says in Quran, Chapter 4 verse 188:

O ye who believe! Eat not up your property among yourselves in vanities: But let there be amongst you Traffic and trade by mutual good-will: Nor kill (or destroy) yourselves: for verily Allah hath been to you Most Merciful!

Al-Quran Chapter 4 verse 188 (source)

Are Stock Options Considered Gambling?

Gambling
Photo Courtesy: Nicu Buculei

Maurice Allais, the French economist described the global stock exchange as “huge casinos of gambling”. That’s because, in gambling, one party gains at the expense of the other party.

In both put and call options, this is exactly what happens, which is why many religious scholars say that options trading is Maysir meaning gambling. (source 1, source 2)

Fatwas about Stock Options

First Fatwa

About trading in stock options, Mufti Taqi Usmani was asked: 

“I need to know if the following share trading is permissible in Islam. (cont.)”

While answering the question, he stated why options trading is haram for various reasons:

The trading of options as in vogue in the stock markets and as explained by you in your questions is not permissible in Sharia. Firstly, because the option is not something tangible which can be bought or sold, and secondly because this transaction has an element of Gharar or Qimar (gambling). Besides, these derivatives have brought negative results on the economy.

Mufti Taqi Usmani (source)

In this Fatwa, Mufti Taqi Usmaini explains that trading of options is not permissible in Sharia for two reasons:

  1. Stock options are not tangible and therefore has an element of Gharar
  2. Stock options have resulted in negative consequences on the economy

Second Fatwa

The OIC Fiqh Academy also issued a fatwa on options trading in resolution number 63 of 1992:

Options contracts as currently applied in the world financial markets are a new type of contracts which do not come under any of the Sharia nominate contracts. 

Since the object of the contract is neither a sum of money nor a utility or a financial right which may be waived, then the contract is not permissible in Sharia.

As these contracts were primarily prohibited error handling is also prohibited.

OIC Fiqh Academy Resolution 63 (source)

The argument made in this fiqh states that stock options are not considered permissible for muslims to engage in because it’s a contract that is not a sum of money, nor a utility, or a financial right that can be waived.

Furthermore, he states that options are a new type of contract that has not come under any Sharia nominate contracts.

Final Words

Islam is a fair religion that insists upon fair play and mutual gain in all business transactions. Not only does options trading involves risk for the individual, but they’re also used to speculate on the price of the underlying asset, which makes it gambling.

Finally, financial derivatives, such as options contracts have brought negative outcomes on the economy, which is bad for society in general. 

A Muslim does not live for worldly gains but obeys the word of Allah in all instances. Any act that can bring social injustice is forbidden so that everyone can lead a successful life.

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