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))
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.