Islamic Stock Investing FAQs #
Original Question: Are options trading permissible in Islam? Some have compared the concept of down-payment to this.
Options fall under the contentious topic of derivatives in Islamic Finance, wherein the future exchange of cash flows is dependent on the price of the underlying assets (stocks, commodities, bonds, etc). It was originally used to hedge against risk rather than exchange tangible goods, but its evolution has seen it being used for speculative purposes.
The reason for these derivative contracts (options, swaps, futures, and forwards) being impermissible is due to several factors:
1.    Inexistence of the contract since the real asset is not existent: The argument that the promise of the counterparty to pay and exercise his rights is not accepted as the promise itself is not a property.
2.    The lack of actual ownership: The prophet mentioned that we should not sell what we do not own, and in the case of derivatives, there is no actual transfer of ownership of the underlying asset, even in the case of the seller.
3.    Lack of delivery: Derivatives are not meant to transfer the ownership of the underlying asset to the other party, but rather it is completed by the exchange of cash flows. Thus, there is no actual possession taking place.
4.    Usurious, uncertainty, and gambling elements are present: Usury will be present due to the unequal distribution of legal entitlements as well as short selling where margin financing is present. Uncertainty and gambling exist due to the unknown final owner of the asset in question.
In the case of down payment (or Urbun in Islamic Finance), where earnest money is involved and if the buyer exercises his right to purchase the asset after a period, the original amount is discounted from the final price. Moreover, in down payment, the buyer is compensating the seller for the time he is not able to sell it to another party. Thus, this payment is not a premium, unlike in an options contract. The Fiqh Academy of the Organisation of Islamic Conference in 1993 concluded that down payment in sales is permissible.
Like any modern financial instrument, there will be views of the majority and minority scholars. The majority of scholars view options trading as haram, whereas some minority scholars allow it for only hedging purposes and not for gaining profits. Furthermore, the flexibility is given on the condition that it is Islamically structured using waad with a fee.
Notable minority scholars holding these views are Prof. Hashim Kamali and Al-Amine. In addition, the Malaysian SAC has also said that warrants are permissible if the underlying is Shariah-compliant and the company that issued the options has ownership of the underlying stocks.
