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Is It Permissible to Buy and Sell Stock Options?

Answered by Shaykh Taha Abdul-Basser

Question: Assalamu Alaikum!  My friends and I have begun investing in stock options, specifically using the long straddle strategy (NOT short) and I wanted to make sure it was all Halal.  Here is a Wikipedia link describing it, the first part is about the long straddle: http://en.wikipedia.org/wiki/Straddle  Using this strategy we purchase both put and call options on a stock before a big event (earnings, major news) so we benefit whether the stock moves up or down.  Some of use are earning very high returns in what has so far been very low risk trades.  There is no interest involved as we are not shorting a stock or borrowing anything from our brokers.  Please let us the status of these investments in the Shariah.

Answer: Bismillahi r-rahmani r-rahim. Al-hamdu li-llahi rabbi l-`alamin.

Executing this strategy is not permissible because it consists of buying and selling stock options (both puts and calls), which are invalid (fasid) and impermissible transactions, according to the preponderant position of contemporary fuqaha’-specialists (AAOIFI SS 20:5.2.2 and 21:3.13). Buying and selling options are invalid and impermissible because option contracts 1) are exchange contracts (`uqud mu`awadah) that are marred by major indeterminateness (gharar fahish) and 2) resemble (or are) games of chance (qimar, maysir). (Abu Hurayrah: The Messenger (salla llahu `alayhi wa-sallam) prohibited pebble sales and indeterminate sales. (Bukhari 2783))

Wa s-salam
Taha Abdul-Basser

Shaykh Taha bin Hasan Abdul-Basser is a scholar of Islamic ethics and law who has acted as a shari`a compliance reviewer, examiner and consultant to investment funds, investment banks, retail banks, financial advisories, legal advisors and other for-profit and not-for-profit entities since 1998.  He is currently the Harvard Islamic Society Chaplain and a member of the Harvard Chaplains.

In addition to his father (with whom he began the study of standard Arabic as a child), he has studied the traditional Islamic disciplines with teachers from the Sudan, the Yemen, Tanzania and Bahrain. He has received traditional licenses (ijazat) in Islamic ethics and law, Prophetic traditions (hadith) and other disciplines from several teachers, including Shaykh Nizam Ya`quby.

The Legal Verdict on Prevalent Forms of Insurance

Answered by Mufti Muhammad ibn Adam

Question: The Imam at our mosque said today in his sermon that Insurance is “haram”. His explanation was that you can’t benefit / profit yourself against something that is hidden, i.e. isn’t yet known. Could you please provide some detailed information on this?

Answer: In the name of Allah, Most Compassionate, Most Merciful,

What the Imam in your local Masjid said is correct, in that Insurance is unlawful (haram) according to Shariah.

The reason why all forms of commercial insurances prevalent in modern trade are unlawful and against the principles of Shariah, is that they have either an element of interest (riba) or chancing (qimar), both of which have been explicitly and sternly forbidden by Allah Most High in the Qur’an:

“Those who swallow usury cannot rise up save as he arises whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permitted trading and forbade usury. He unto whom an admonition from his Lord cometh, and (he) refrained (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returns (to usury) – Such are rightful owners of the Fire. They will abide therein.

Allah hath blighted usury and made almsgiving fruitful. Allah loveth not the impious and guilty….

And if ye do not, then be warned of war (against you) from Allah and His messenger. And if ye repent, then ye have your principal (without interest). Wrong not, and ye shall not be wronged.” [Qur’an, 2.275-279]

And, regarding chancing and gambling (qimar):

“They question thee about strong drink and chancing. Say: In both is great sin, and (some) utility for men; but the sin of them is greater than their usefulness. And they ask thee what they ought to spend. Say: that which is superfluous. Thus Allah maketh plain to you (His) revelations, that haply ye may reflect.” (Qur’an, 2.219)

And:

“O ye who believe! Strong drink and chancing and idols and divining arrows are only an infamy of Satan’s handiwork. Leave it aside in order that ye may succeed.” [Qur’an, 5.90]

The Ruling Regarding Prevalent Forms of Insurance

Insurance is chancing [= ‘relying on or inviting the risks of chance’ – Merriam-Webster’s Unlimited Dictionary] in the sense that the premiums are paid for certain, whereas the return is uncertain. You may loose all the premiums you paid or may receive in return more then what you paid. This is known as chancing. There is also interest as money is being exchanged here for money and one party pays less and receives more in return.

This is the reason why the great contemporary scholars from all over the world have declared all types of prevalent insurances unlawful (haram), unless when one is compelled to affect it by the Government.

The Islamic Fiqh Academy (Jeddah), and which consists of top recognized scholars from around the globe researched the issue in considerable depth. The meeting was attended by no less than 150 such scholars from 45 Islamic Countries, including my respected teacher Shaykh Mufti Muhammad Taqi Usmani (may Allah preserve him), and they unanimously declared all types of prevalent insurances to be unlawful.

How About Car Insurance?

However, it should be remarked here, that since third party car insurance is a mandatory legal requirement for every car-owner, one can affect this kind of insurance, as it is not possible for one to avoid it.

Is There An Alternative?

Islamic financial institutions offer a viable and Islamically-accepted alternative, which is takaful, a form of cooperative insurance. Details of this are available through such institutions.

And Allah Knows Best
Muhammad ibn Adam
Darul Iftaa
Leicester , UK