Are Options halal and allowed in Islam? This is a question that perplexes many Muslim investors in the stock market. Let’s just say it right off the bat that Options are not permissible in Islam.
Alhamdulillah, Islamic law brings benefit to society and we will see why its rules are so relevant even today. In fact, Islamic law is a living miracle that points to its divine origin. Human beings could not have come up with a legal framework so perfect and profound in nature. Many modern legal frameworks, including the English Common Law and that of the United States, derive their basis from Islamic law.[1]
Definition: An Option is a contract between two parties giving the taker (buyer) the right, but not the obligation, to buy or sell a security at a predetermined price on or before a predetermined date. To acquire this right the taker pays a premium to the writer (seller) of the contract.
So you are, in essence, trading promises.
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Islamic scholars call this a zero-sum game, where one wins and the other loses without receiving any mutual benefit.
The underlying issue in Options is that the parties involved are really betting against each other’s beliefs. For example, one believes the stock will go up and the other believes it will go down. Whoever wins makes money, while the other loses. Islamic scholars call this a zero-sum game, where one wins and the other loses without receiving any mutual benefit. Dr. Sami Al-Suwailem explains that, in a zero-sum game, one party gains at another’s expense. It is a “transfer of wealth for no counter-value” and this is “condemned in the Qur’an.”
Islam wants transactions to be of mutual gain. It prohibits transactions that bring harm and create enmity in the hearts. This is one of the reasons why gambling is prohibited as well. If we look at the recent history of the US stock market, we see how zero-sum games have bankrupted many investors. The recent GameStop controversy was an example of that.
Options are a type of derivative, which are all zero-sum games. Shaykh Yusuf DeLorenzo holds a similar opinion and states that this sort of economic activity is clearly forbidden under Shariah law.
Apart from it being a zero-sum game, Options also go against other Shariah precepts. According to Mufti Faraz Adam’s research piece (which has been the basis for this article)[2], they are prohibited for involving gharar (uncertainty) and an invalid subject matter (mabi’) of sale. The exercising of the Option is unknown and uncertain. This ambiguity in the subject matter makes it gharar.
Secondly, Options are essentially a choice which you are purchasing. A choice is not something for which consideration can be given. According to Mufti Muhammad Taqi Uthmani, an Option is a ‘promise’ which is permissible. But if it requires payment of a fee, it is invalidated under Shariah. Mufti Uthmani further states that a premium is paid without any transfer of property, benefits or rights. Hence, when there is no counter-exchange being transferred, a premium is unwarranted.
The OIC Islamic Fiqh Academy, the European Council, the AAOIFI, and others have all ruled Options as impermissible under the Shariah law.
You may also be interested in reading our previous article on how to check if a stock is halal.
Also check out our free halal stock screener: https://muslimxchange.com/
References:
[1] John A. Makdisi, The Islamic Origins of the Common Law, 77 N.C. L. Rev. 1635 (1999)
[2] Adam, F. (2018, August). Taking a Leap with Sharia in the World of Options. Retrieved February 12, 2021, from https://shariyah.com/wp-content/uploads/2019/07/Taking-a-Leap-with-Sharia-in-the-World-of-Options-Dis.pdf
Dr. Bilal Philips