FINANCE

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KembaraXtra – Islamic Derivatives: Option Contract, Premium, Call Option & Put Option (With Scenarios)


🔹 What is an Option Contract?
 
An option contract is a financial agreement that gives the buyer the right (but not the obligation) to:
  • Buy or
  • Sell an asset
 
at a fixed price (strike price) within a certain time.
 
👉 The buyer pays a premium for this right.


🔸 Scenario (Option Contract)
  • You pay $5 (premium)
  • You get the right to buy a stock at $100 (strike price) in the future
 
👉 You can choose to:
  • Use the option if it is profitable ✅
  • Ignore it if it is not ❌


🔹 What is Strike Price?
 
The strike price is the fixed price at which you can:
  • Buy (call option), or
  • Sell (put option)
 
👉 It is agreed at the beginning of the contract


🔹 What is a Premium?
 
A premium is the fee paid to buy the option contract.
  • Paid by the buyer
  • Received by the seller
  • It is non-refundable
 
👉 It is the cost of having flexibility and choice


🔹 What is a Call Option?
 
A call option gives the right to buy an asset at the strike price.


🔸 Scenario (Call Option)
  • Strike price = $100
  • Premium = $5
 
👉 If market price rises to $120:
  • Buy at $100
  • Sell at $120
  • Profit = $20 − $5 = $15
 
👉 If market price falls to $90:
  • Do not use the option
  • Loss = $5 (premium)


🔹 What is a Put Option?
 
A put option gives the right to sell an asset at the strike price.


🔸 Scenario (Put Option)
  • Strike price = $100
  • Premium = $5
 
👉 If market price falls to $80:
  • Buy at $80
  • Sell at $100
  • Profit = $20 − $5 = $15
 
👉 If market price rises to $120:
  • Do not use the option
  • Loss = $5 (premium)


🔹 Key Points (Note Form)
  • Option contract → Right, not obligation
  • Strike price → Fixed agreed price
  • Premium → Cost paid for the option
  • Call option → Profit when price goes up 📈
  • Put option → Profit when price goes down 📉


🔹 Simple Summary
  • Option = choice with a cost (premium)
  • Call = right to buy
  • Put = right to sell
  • Strike price = agreed price
 

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KembaraXtra – Islamic Derivatives: Call Option & Put Option Using Goods (Simple Scenarios)


🔹 Call Option (Goods Example)
 
👉 A call option gives the right to buy goods at a fixed price.
 
🔸 Scenario (Using Wheat 🌾)
  • You pay a premium of $5
  • You get the right to buy 100 kg of wheat at $100 (strike price) in 1 month
 
👉 If market price rises to $130:
  • You buy wheat at $100
  • Market value = $130
  • Profit = $30 − $5 = $25 ✅
 
👉 If market price falls to $90:
  • You don’t use the option
  • Loss = $5 (premium) ❌


🔹 Put Option (Goods Example)
 
👉 A put option gives the right to sell goods at a fixed price.
 
🔸 Scenario (Using Rice 🍚)
  • You pay a premium of $5
  • You get the right to sell 100 kg of rice at $100 (strike price) in 1 month
 
👉 If market price falls to $70:
  • You buy rice at $70
  • Sell at $100
  • Profit = $30 − $5 = $25 ✅
 
👉 If market price rises to $120:
  • You don’t use the option
  • Loss = $5 (premium) ❌


🔹 Key Idea
  • Call option (goods) → Profit when price goes up 📈
  • Put option (goods) → Profit when price goes down 📉
  • Premium = small cost for flexibility


🔹 Simple Summary
  • Call → Right to buy goods cheaper later
  • Put → Right to sell goods higher later
  • If not profitable → you only lose the premium


 

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KembaraXtra – Islamic Derivatives: Call & Put Options Using Palm Oil (Malaysia Example)


🔹 Call Option (Palm Oil Example 🌴)
 
👉 A call option gives the right to buy palm oil at a fixed price.
 
🔸 Scenario
  • You pay a premium of RM50
  • You get the right to buy 1 ton of palm oil at RM4,000 (strike price) in 1 month
 
👉 If market price rises to RM4,500:
  • You buy at RM4,000
  • Market value = RM4,500
  • Profit = RM500 − RM50 = RM450 ✅
 
👉 If market price falls to RM3,800:
  • You do not use the option
  • Loss = RM50 (premium) ❌


🔹 Put Option (Palm Oil Example 🌴)
 
👉 A put option gives the right to sell palm oil at a fixed price.
 
🔸 Scenario
  • You pay a premium of RM50
  • You get the right to sell 1 ton of palm oil at RM4,000 (strike price) in 1 month
 
👉 If market price falls to RM3,500:
  • You buy at RM3,500
  • Sell at RM4,000
  • Profit = RM500 − RM50 = RM450 ✅
 
👉 If market price rises to RM4,300:
  • You do not use the option
  • Loss = RM50 (premium) ❌


🔹 Why This Example Is Important
  • Palm oil is a real commodity widely traded in Malaysia
  • These examples show how options are used for:
    • Hedging risk (protecting prices)
    • Speculation (seeking profit)


🔹 Simple Summary
  • Call option (palm oil) → profit when price goes up 📈
  • Put option (palm oil) → profit when price goes down 📉
  • Premium = small cost for flexibility
 

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KembaraXtra – Islamic Derivatives: Time Limit & Exercising Call and Put Options


🔹 Is There a Time Limit?
 
👉 Yes — every option contract has a time limit, called the expiry date.
  • You can only use (exercise) the option within this time
  • After the expiry date → the option becomes worthless


🔹 When Can You Exercise the Option?
 
This depends on the type of option:


🔸 1. American Option (Flexible)
  • Can be exercised anytime before expiry
 
👉 So:
  • Call option → exercise when price is above strike price 📈
  • Put option → exercise when price is below strike price 📉
 
✔ You can choose the best time


🔸 2. European Option (Restricted)
  • Can be exercised only on the expiry date
 
👉 Even if prices are favorable earlier:
  • You must wait until the end


🔹 Example (Simple)
 
Call Option:
  • Strike price = RM4,000
  • Expiry = 1 month
 
👉 If market price becomes RM4,500:
  • American option → exercise anytime before expiry ✅
  • European option → wait until expiry ❗


Put Option:
  • Strike price = RM4,000
 
👉 If market price drops to RM3,500:
  • American option → exercise anytime ✅
  • European option → only at expiry ❗


🔹 Important Idea
 
✔ You don’t have to exercise immediately
✔ You choose the most profitable time (if allowed)
✔ But you cannot go beyond the expiry date


🔹 Simple Summary
  • Yes, there is a time limit (expiry date)
  • American option → exercise anytime before expiry
  • European option → exercise only at expiry
  • After expiry → ❌ no value
 

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KembaraXtra – Islamic Derivatives: Can Call Option and Put Option Exist in the Same Contract?


🔹 Short Answer
 
👉 Yes, they can — but it depends on how the contract is structured.


🔹 1. Separate Contracts (Most Common)
 
Usually:
  • A call option and a put option are two different contracts
 
Example:
  • You buy a call option (right to buy)
  • Someone else buys a put option (right to sell)
 
👉 These are normally not combined


🔹 2. Combined in One Strategy (Yes, Possible)
 
Sometimes, both are used together in a strategy, such as:
 
🔸 Straddle Strategy
  • You buy:
    • 1 call option
    • 1 put option
  • Same asset, same strike price, same expiry
 
👉 You profit if price moves a lot (up or down)


🔸 Scenario (Palm Oil 🌴)
  • Strike price = RM4,000
  • Buy:
    • Call option (premium RM50)
    • Put option (premium RM50)
 
👉 Total cost = RM100
  • If price rises to RM4,500 → call option profits ✅
  • If price drops to RM3,500 → put option profits ✅
 
👉 You win if the market moves significantly


🔹 3. In One Contract (Rare/Structured)
 
Some financial products may combine both rights in one contract, but:
  • This is more complex and structured
  • Not common in basic trading


🔹 Shariah Perspective (Important)
  • Combining both often increases:
    • ❌ Speculation
    • ❌ Uncertainty (gharar)
  • So it is generally not acceptable in Islamic finance


🔹 Simple Summary
  • Usually → call and put are separate contracts
  • Can be combined → in strategies like straddle
  • Same contract → possible but uncommon
  • Islamic view → ❌ generally not permissible
 

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KembaraXtra – Islamic Derivatives: Which Is More Profitable — Call Option or Put Option?


🔹 Short Answer
 
👉 Neither is always more profitable.
It depends on how the market moves.


🔹 Key Idea You Need to Fix
 
You said:
 
“Call option only buy at strike price”
 
⚠️ Actually:
  • Call option → buy at strike price, then you can sell at market price
  • Put option → buy at market price, then sell at strike price
 
👉 Both involve buying and selling, just in different order.


🔹 When Call Option Is More Profitable 📈
 
Use a call option when you expect price to go up.
 
Example:
  • Strike = RM4,000
  • Price rises to RM4,500
 
👉 Profit = RM500 − premium
 
✔ Big price increase → high profit


🔹 When Put Option Is More Profitable 📉
 
Use a put option when you expect price to go down.
 
Example:
  • Strike = RM4,000
  • Price drops to RM3,500
 
👉 Profit = RM500 − premium
 
✔ Big price decrease → high profit


🔹 Important Comparison
  • Call option profits from price increase
  • Put option profits from price decrease
 
👉 Profit depends on:
  • How much price moves
  • Direction of movement


🔹 Which One Gives More Profit?
 
👉 They can give the same profit if price moves equally.
 
Example:
  • Price goes up RM500 → call profit = RM500
  • Price goes down RM500 → put profit = RM500
 
✔ So they are symmetrical


🔹 The Real Difference
  • Call → bullish (expect price ↑)
  • Put → bearish (expect price ↓)
 
👉 The “more profitable” one is simply the one that matches market direction


🔹 Simple Summary
  • No option is always better ❌
  • Call = profit when price goes up 📈
  • Put = profit when price goes down 📉
  • Profit depends on correct prediction, not type
 

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KembaraXtra – Islamic Derivatives: Option Contracts Under Shariah Law


🔹 What is an Option Contract (Reminder)
 
An option contract gives the buyer the right (not obligation) to:
  • Buy (call option) or
  • Sell (put option)
 
an asset at a fixed price (strike price) in the future, by paying a premium.


🔹 Shariah View on Option Contracts
 
👉 The majority of Muslim scholars consider conventional option contracts:
 
❌ Not permissible (non-Shariah compliant)


🔹 Main Reasons Why Options Are Not Allowed
 
1. Premium Without Real Countervalue
  • The buyer pays a premium just for a right
  • No actual asset or service is exchanged
 
👉 Considered similar to taking money without valid exchange


2. Gharar (Excessive Uncertainty)
  • Outcome depends on future price movements
  • High level of uncertainty
 
👉 Shariah prohibits excessive uncertainty in contracts


3. Maisir (Gambling-Like Behavior)
  • Profit depends on speculation
  • One party gains, the other loses
 
👉 Similar to gambling, which is prohibited


4. No Ownership of Underlying Asset
  • The buyer does not own the asset
  • The contract is about rights, not real goods
 
👉 Violates principle of ownership in trade


5. Trading of Pure Rights
  • Options involve buying and selling rights only
  • Not tangible assets
 
👉 Many scholars do not recognize this as a valid subject of sale


🔹 Any Different Opinions?
 
👉 Some minority scholars try to justify options using:
  • Concepts like ‘urbun (deposit sale)
 
But:
  • This view is not widely accepted


🔹 Islamic Alternatives
 
Instead of options, Islamic finance uses:
  • ✅ Salam → pay now, receive later
  • ✅ Istisna’ → contract for manufacturing
  • ✅ Wa’d (unilateral promise) → sometimes used in structured products


🔹 Simple Summary
  • Option contracts = right with premium
  • Contain:
    • ❌ Uncertainty (gharar)
    • ❌ Speculation (maisir)
    • ❌ No real ownership
  • 👉 Therefore, generally not allowed in Shariah
 

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KembaraXtra – Islamic Derivatives: How Futures Contracts Work (Conventional vs Islamic)


🔹 1. How Conventional Futures Contracts Work
 
A futures contract is an agreement to buy or sell an asset at a fixed price on a future date.


🔸 Step-by-Step Process
  1. Agreement Today
    • Buyer and seller agree on:
      • Price
      • Quantity
      • Future delivery date
  2. Margin Deposit
    • Both parties deposit margin with a clearing house
  3. Daily Price Adjustment
    • Profits/losses updated daily (mark-to-market)
  4. Settlement
    • At expiry:
      • Either physical delivery, or
      • Cash settlement (most common)


🔸 Case Scenario (Palm Oil 🌴)
  • You agree to buy 1 ton of palm oil at RM4,000 in 1 month
 
👉 After 1 month:
 
If price = RM4,500
  • You gain RM500 ✅
 
If price = RM3,500
  • You lose RM500 ❌
 
👉 Usually, no real delivery — just profit/loss paid


🔹 Key Features (Conventional)
  • Both payment and delivery deferred
  • Heavy speculation
  • Often no ownership or delivery
  • Involves margin system


🔹 2. How Islamic “Futures-like” Contracts Work
 
👉 True conventional futures are not allowed in Islam
But Islam provides alternatives that achieve similar goals.


🔸 (A) Salam Contract (Main Alternative)
 
How it works:
  • Buyer pays full price upfront
  • Seller delivers goods later


🔸 Case Scenario (Palm Oil 🌴)
  • You pay RM4,000 now
  • Seller agrees to deliver 1 ton palm oil in 1 month
 
👉 After 1 month:
 
If market price = RM4,500
  • You benefit (bought cheaper) ✅
 
If market price = RM3,500
  • You still must accept goods ❌


🔸 (B) Istisna’ (For Manufacturing)
  • Used for custom goods (e.g., buildings, machinery)
  • Payment can be flexible (not fully upfront)
  • Delivery happens in the future


🔹 Key Differences (Simple)
  • Conventional futures
    • ❌ Both payment & delivery delayed
    • ❌ Speculation
    • ❌ No real ownership
  • Islamic (Salam)
    • ✅ Payment upfront
    • ✅ Real goods involved
    • ✅ Less uncertainty


🔹 Simple Summary
  • Conventional futures = agreement now, settle later (both sides delayed) → ❌ not Shariah-compliant
  • Islamic alternative (Salam) = pay now, receive later → ✅ allowed
 

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