Are Options Haram? Ruling On Option Contracts

Muslims ask are options haram in Islam? Most Islamic scholars consider margin trading, options, and futures haram or prohibited since they involve uncertainty and are considered gambling, which is strictly forbidden in Islam.

I will try to cover all topics related to option trading and Islamic rulings regarding them from major scholars.

Why Are Options Haram?

An option contract is defined as a contract of exchange that allows one of two parties the exclusive right to sell or buy something specified in exchange for a specific price, within a set period of time or until a specific date.

There are two types of options:

• Call option
• Put option

A contract of this type simply entails the right to buy or sell for a specified amount. No specific shares are referred to in the contract. Therefore what is being offered is the option itself, and this contract is obligatory on the seller of the option not on the buyer of the option.

Resolution of the Islamic Fiqh Council:

“With regard to this type of contract and the form in which it now appears in the financial markets, because of what it involves of ambiguity and gambling, resolutions and fatwas have been issued stating that it is prohibited to sell or deal in such contracts.”

[source]

The Islamic teaching forbids trading in unclear contracts, including call and put options, on worldwide markets.

The fact that the entire function of the contract is tied to price volatility, to the extent that it does not allow both parties to win, qualifies these contracts as ambiguous.

One party must lose in order for the other to win. As a result, both parties are praying and hoping that the other party would lose. In Islam, it is likewise forbidden to pray for the death of others.

Allah says:

“Satan’s plan is to stir up hostility and hatred between you with intoxicants and gambling and to prevent you from remembering Allah and praying. Will you not then abstain?”

[Quran 5:91]

We should also focus on the uncertainty of these volatile markets. Due to the uncertainty and betting against each other options are also considered a form of gambling.

Gambling is strictly prohibited in Islam. Ibn Abbas said:

The Quranic verse :”O ye who believe ,approach not prayer with minds befogged until you can understand all they say,” and the verse: “They ask thee concerning wine and gambling. Say: In them is great sin and some profit for men ,” were repeated by the verse in Surat al-Ma’idah: ”O ye who believe, intoxicants and gambling,(dedication) stones.

[Sunan Abi Dawud 3672]

One more reference related to uncertainty and hoping that the other party loses.

Ja’far ibn Abi’l-Mughira said, “Sa’id ibn Jubayr stayed with me and said that Ibn ‘Abbas related to me that he used to say, ‘Where are those who play with gambling arrows for the slaughtered camel? They buy a camel with ten shares. Then they shuffle the arrows and it becomes nine shares and they continue until comes down to one share. The others lose their shares to the one share. That is gambling (arrow-shuffling).'”

[Al-Adab Al-Mufrad 1259]

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Fatwa About Options

The OIC Fiqh Academy:

“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]

According to the logic in this fiqh, stock options are not acceptable for Muslims.

Mufti Taqi Usmani also issued a fatwa:

“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.”

[source]

Is Options Trading Like Gambling?

Options trading is not generally called gambling but options involve uncertainty and betting on the other party in order to win. Uncertainty and betting on the other party to lose is just like gambling and the same Islamic rulings will be applied here.

As Muslims are ordered to avoid any form of gambling they should avoid options trading as well.

Which Type Of Trading Is Halal?

Trading generally is allowed if it does not involve any major uncertainties and betting against one another. Also, you have to make sure that trading does not involve any interest as interest is also strictly forbidden in Islam.

Halal trading includes stock trading and forex trading if there is no interest involved in the transactions. In forex, a trader needs to open up Islamic accounts that do not have any swap commissions. Swap commissions are also a form of interest. You can read Is Forex Trading Halal Or Haram?

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Final Thoughts

Islam is a just religion that requires fair play and mutual benefit in all economic interactions. Options are a type of wagering against another person or entity that is prohibited by Islam.

Another danger in options trading is the high level of uncertainty due to its volatility. It is considered gambling, which is also forbidden in Islam.

Avoid options trading because it is haram and completely forbidden in Islam, and numerous Islamic scholars have declared it haram in fatwas.

And Allah Knows Best.