Hey Guys. I’m very confused on options in Islam

[tinyfaith]

So I have a few questions for this sub.

1. I heard that options are haram, but what if they are leap options, so having options for a stock over a year long. I feel like there’s much less risk the longer you go.
2. Also, what exactly makes options haram? Options, at least call options, seems like it’s the same risk as holding shares because if it goes up, you profit, and if it goes down, you lose. For instance, I understand one side wins and the other loses, but each side took their own risk in their trades. Also, I don’t feel like it’s necessarily gambling because like holding shares, as long as you do research on a company and are certain and confident with your decision and are willing to take the risk that comes with all forms of investing, it shouldn’t be gambling then right?
3. How about selling calls and puts? Are they also haram because I’ve been hearing more people say they’re halal than haram.

I’m asking these questions because options is a way to make exponential amounts of money. However, I’m trying to find out if they’re 100% haram because I’d rather please Allah than disobey what he wants.

 

[sbmor777]

@tinyfaith There used to be a couple really good research papers by Mufti Faraz Adam on this but I can no longer find them. All I can is this brief article summarizing the paper and brief answers to questions by Mufti Taqi Usmani.

https://www.muslimink.com/finance/is-options-trading-halal/

https://medium.com/@Ibn_al_tagir/mu...tures-options-swaps-and-equities-9168180e0fb1

What makes options haram, according to the majority of scholars, is that they are gambling and some consider the transaction itself to be invalid (paying for gains/losses based on unpredictable future events).

Edit: found the in-depth research papers, highly recommend reading these. You can download them from the links.

https://shariyah.net/taking-a-leap-with-sharia-in-the-world-of-options/

https://shariyah.net/binary-options-when-investment-becomes-gambling/

 

[annache]

@tinyfaith I think you have two choices. You can follow the conventional Islamic opinion that derivatives are haram, as is well laid out in the papers cited by MukLegion below. I dont think leapoptions make a difference, they are just longer term.

Or you can question the use of sharia interpretations for the prohibition of derivatives. Personally I think you are right - an option gives you exposure to a stock just as holding the underlying stock does. The difference is the potential for high leverage.

So I would make the following points:

The papers (even Usmani's note) make reference to "the sharia prohibits..." without justification. I think these are just assertions and constructions of Islamic scholars, based on a list of approved sharia contract forms and other ideas one can find in the voluminous scholarly fiqh writings from the middle ages. They are not revelations from Allah.

Gharar is not mentioned in the Quran. If you read the couple of Quranic verses prohibiting maysir, and the hadith in which the prophet discusses how to buy dates (not before they are ripe, but elsewhere he says you can buy them for forward delivery if the weight and time are specified), you realize that any scholarly linkage from the Quran and sunnah to the prohibition of derivatives is so extremely tenuous as to be non-existent.

I do not have confidence in Islamic scholars' understanding of risk. Many prohibit insurance because they say it is like gambling. Insurance is actually the opposite of gambling - it is risk aversion! They totally ignore the advances in modern finance in the pricing of risk, where some Nobel prized have been awarded (Markowitz, Sharpe, and Merton, for example.)

The idea that there are winners and losers from options trading is of course true, but that can be true also of any trade!

 

[harotoiz]

@annache I have no idea why in the world insurance which, like you said, is a risk aversion considered haram! At times, things seem too far stretched out from the scholars!

Allah knows the best!

 

[annache]

@harotoiz The reason as I understand it is that in sharia the insurance contract is considered in isolation from the insured "peril". The payoff of the insurance contract is of course uncertain, containing gharar. But this is not the right way to do risk management. You do it from the viewpoint of the individual or business which is managing its risk, not from the viewpoint of each contract in isolation. Scholars need to learn about negative covariance. There is also the issue of riba - insurance companies use a lot of interest bearing bonds to hedge their policy book. But I dont think the government and corporation bond issuers are being exploited by riba!

 

[resjudicata]

@annache I'd rather go with the latter choice, you bring up very good points which I find to be true regarding interest and shorting which are under blanket ban from literalist scholars, what do you think of those? Shorting and margin interest that is.

 

[annache]

@resjudicata I've read quite a bit from the literalists who assert that interest=riba, but reject that approach. It makes much more sense and is more consistent with masaqid sharia (fairness, justice and welfare) to see riba at the time of the prophet as financial exploitation and oppression by moneylenders on poor debtors. Millions today in the modern economy who borrow successfully to improves their lives and receive pensions from bond interest are not being exploited or unjust. See scholars like Fazlur Rahman, Abdullah Saeed, and Prof. M. Farooq on riba. So I dont see anything wrong with interest on a margin account.

I think Islamic scholars mix up the motive (gambling = prohibited maysir/gharar) with the instrument. Options and futures can be used to hedge (reduce gharar=a good thing) as well as to increase exposure or to speculate. Using their logic, because you can gamble by flipping a gold dinar coin it should be haram!

The Islamic argument against shorting "do not sell what you do not have" made sense with the uncertainties of selling unborn calves and the possible catch of a fisherman. But today stocks can be shorted for you by brokers who borrow and sell them for you securely with guaranteed delivery and through regulated exchanges, so the argument does not make sense to me.

Scholars would do better to advise people in finance by telling them to educate themselves and make sure they understand the risks of shorting and derivatives (higher leverage, possiblity of high losses) and to make sure that the potential exposure is within the investor's risk budget and can be tolerated (or even better, admit they (Islamic scholars) are not financial experts, better to get a financial planner!) I personally dont use shorting, I just like to get equity exposure and ride it. But thats my own style.