FINANCE

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KembaraXtra – Islamic Derivatives: Leverage in Share (Stock) Investment (Note Form)


🔹 1. Basic Idea
 
👉 In normal share investing:
  • ❌ No leverage
  • ✔ You pay full price of shares


✔ Example (No Leverage)
  • Share price = RM10
  • You buy 100 shares = RM1,000
 
✔ You fully own the shares


🔹 2. When Leverage Exists in Shares
 
👉 Leverage happens when you borrow money to buy shares
 
✔ This is called:
👉 Margin trading


🔹 3. How Margin Trading Works
 
✔ Example
  • Your money = RM1,000
  • Borrow from broker = RM1,000
 
👉 Total investment = RM2,000
 
✔ Leverage = 2x


🔹 4. Profit & Loss Effect
 
📈 If Price Increases
  • Gain on RM2,000 investment
 
👉 Profit is higher than your own capital


📉 If Price Decreases
  • Loss on RM2,000
 
👉 Loss can exceed your own money
 
❗ You may owe money


🔹 5. Key Points
  • Without margin → no leverage
  • With margin → leverage exists
  • Leverage increases:
    • Profit ✅
    • Loss ❌


🔹 6. Comparison with Futures & Options
  • Shares (normal):
    • Low risk
    • No leverage
  • Shares (margin trading):
    • Moderate leverage
  • Futures:
    • High leverage
  • Options:
    • Very high leverage


🔹 7. Shariah Insight
 
👉 Margin trading may be problematic:
  • ❌ Involves borrowing (possibly riba)
  • ❌ High risk/speculation
 
✔ Normal share investing:
  • Generally permissible


🔹 Simple Summary
  • Shares = no leverage (normally)
  • Leverage only if:
    • You borrow money (margin trading)


🔹 Final Exam Insight
 
👉 “Leverage in share trading arises only when investors use borrowed funds (margin trading), unlike futures and options where leverage is inherent in the contract structure.”
 

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Published on
KembaraXtra – Islamic Derivatives: Why One Option Contract Represents 100 Shares


🔹 Key Idea
 
👉 In stock options:
 
✔ 1 option contract = 100 shares of stock
 
👉 This is a standardized rule in the market


🔹 1. Why 100 Shares?
 
👉 The market uses standardization to:
  • Make trading easier
  • Ensure consistency
  • Simplify pricing
 
✔ So:
  • 1 contract always controls 100 shares


🔹 2. How It Works
 
✔ Example (Call Option)
  • Strike price = RM10
  • 1 contract = 100 shares


📅 If you exercise:
 
👉 You can buy:
  • 100 shares × RM10 = RM1,000
 
✔ Not just 1 share — always 100 shares


🔹 3. Premium Calculation
 
👉 Premium is quoted per share, but paid for 100 shares


✔ Example
  • Premium = RM2
 
👉 Total cost:
  • RM2 × 100 = RM200


🔹 4. Profit Calculation
 
👉 Profit is also multiplied by 100


✔ Example
  • Price increases by RM5
 
👉 Profit:
  • RM5 × 100 = RM500


🔹 5. Why This Is Important (Leverage Effect)
 
👉 With small premium:
  • You control 100 shares
 
✔ This creates leverage


🔹 6. Simple Comparison
  • Buying shares:
    • Pay full price for 100 shares
  • Buying option:
    • Pay small premium
    • Control same 100 shares


🔹 Simple Summary
  • 1 option contract = 100 shares
  • Premium and profit are multiplied by 100
  • This increases leverage


🔹 Final Exam Insight
 
👉 “An option contract typically represents 100 shares to standardize trading, allowing investors to control a larger position with a relatively small premium.”
 

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Published on
KembaraXtra – Islamic Derivatives: Applying “1 Option = 100 Shares” (All 4 Cases with Scenario)


🔹 Common Setup (Same for All)
  • Strike price = RM10
  • Premium = RM2
  • Contract size = 100 shares
 
👉 Total premium paid/received =
RM2 × 100 = RM200


🔹 1. Long Call (Buy Call) 📈
 
👉 Expect price to increase
 
📅 Scenario: Price rises to RM15
  • Gain per share = RM5
  • Total gain = RM5 × 100 = RM500
 
👉 Net profit:
  • RM500 − RM200 = RM300 profit ✅


📅 If price falls
  • Do not exercise
 
👉 Loss = RM200 only ❌


🔹 2. Short Call (Sell Call) 📉
 
👉 Expect price to stay or fall
 
📅 Scenario: Price rises to RM15
  • Loss per share = RM5
  • Total loss = RM500
 
👉 Net loss:
  • RM500 − RM200 = RM300 loss ❌


📅 If price stays below RM10
  • Option not exercised
 
👉 Profit = RM200 (premium) ✅


🔹 3. Long Put (Buy Put) 📉
 
👉 Expect price to decrease
 
📅 Scenario: Price falls to RM5
  • Gain per share = RM5
  • Total gain = RM500
 
👉 Net profit:
  • RM500 − RM200 = RM300 profit ✅


📅 If price rises
  • Do not exercise
 
👉 Loss = RM200 only ❌


🔹 4. Short Put (Sell Put) 📈
 
👉 Expect price to stay or rise
 
📅 Scenario: Price falls to RM5
  • Loss per share = RM5
  • Total loss = RM500
 
👉 Net loss:
  • RM500 − RM200 = RM300 loss ❌


📅 If price stays above RM10
  • Option not exercised
 
👉 Profit = RM200 (premium) ✅


🔹 Key Pattern (Very Important)
 
👉 Always multiply by 100 shares
  • Profit/loss per share × 100
  • Premium × 100


🔹 Simple Summary
  • Long call → profit when price ↑
  • Long put → profit when price ↓
  • Short call → risk when price ↑
  • Short put → risk when price ↓
 
👉 All results must be × 100 shares


🔹 Final Exam Insight
 
👉 “Since each option contract represents 100 shares, all profits, losses, and premiums must be multiplied by 100 when calculating outcomes for long and short call and put positions.”
 

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Published on
KembaraXtra – Islamic Derivatives: Is “1 Option = 100 Shares” the Same as a Warrant?


🔹 Short Answer
 
👉 ❌ No, an option is NOT a warrant
👉 The “100 shares” rule is just a standard contract size


🔹 Why They Look Similar
 
👉 Both options and warrants:
  • Give the right to buy shares
  • Involve a fixed number of shares
  • Have strike price and expiry
 
✔ So they appear similar


🔹 Key Differences
 
✔ 1. Who Issues It
  • Option:
    • Created by investors/traders
  • Warrant:
    • Issued by the company


✔ 2. Where Shares Come From
  • Option:
    • Shares come from other investors
  • Warrant:
    • Shares come from the company (new shares)


✔ 3. Effect on Number of Shares
  • Option:
    • ❌ No change in total shares
  • Warrant:
    • ✔ Increases total shares (dilution)


✔ 4. Meaning of “100 Shares”
 
👉 In options:
  • 1 contract = 100 shares
  • This is only:
    • ✔ A market standard
    • ✔ For convenience in trading
 
❗ It does NOT mean:
  • Company issued it
  • It is a warrant


🔹 Key Insight
 
👉 The 100 shares rule = unit size only, not type of contract


🔹 Simple Summary
  • Option ≠ warrant ❌
  • Option:
    • Market contract
    • No new shares
  • Warrant:
    • Company-issued
    • Creates new shares


🔹 Final Exam Insight
 
👉 “Although option contracts typically represent 100 shares, this is merely a standardization feature and does not make them equivalent to warrants, which are issued by companies and involve the creation of new shares.”
 

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Published on
KembaraXtra – Islamic Derivatives: Quick Trick to Identify Option vs Warrant (Exam Shortcut)


🔹 The Fastest Way to Differentiate
 
👉 Ask yourself this question:
 
❓ “Does the company issue it?”
  • ✔ YES → Warrant
  • ❌ NO → Option


🔹 Trick 1: Source of Shares
  • Option:
    • Shares come from other investors
  • Warrant:
    • Shares come from the company (new shares created)
 
👉 If new shares are created → Warrant


🔹 Trick 2: Effect on Shares Outstanding
  • Option:
    • ❌ No change
  • Warrant:
    • ✔ Increases number of shares
 
👉 Increase in shares → Warrant


🔹 Trick 3: Where It Trades
  • Option:
    • Traded in market between investors
  • Warrant:
    • Issued by company (often with bonds)


🔹 Trick 4: Purpose
  • Option:
    • Trading / speculation / hedging
  • Warrant:
    • Raise capital for company


🔹 Super Simple Memory Trick
 
👉 “Company = Warrant, Market = Option”


🔹 Final 1-Line Exam Answer
 
👉 “Options are market-traded contracts between investors, while warrants are issued by companies and result in the creation of new shares upon exercise.”
 

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Published on
KembaraXtra – Islamic Derivatives: Is a Stock Option Similar to a Warrant?


🔹 Short Answer
 
👉 ✔ Yes, they are similar in concept
👉 ❌ But they are NOT the same


🔹 1. Why They Are Similar
 
👉 Both give:
  • The right (not obligation)
  • To buy shares
  • At a fixed price (strike price)
  • Within a time period


✔ Example (Both)
  • Strike price = RM10
  • Market price = RM15
 
👉 Buy at RM10 → sell at RM15
✔ Profit = RM5


🔹 2. Key Differences
 
✔ 1. Who Issues It
  • Stock Option (Employee):
    • Issued by company to employees
  • Warrant:
    • Issued by company to investors/public


✔ 2. Purpose
  • Stock Option:
    • Motivate employees
    • Compensation
  • Warrant:
    • Raise capital
    • Attract investors


✔ 3. Tradability
  • Stock Option (employee):
    • ❌ Usually NOT tradable
  • Warrant:
    • ✔ Tradable in market


✔ 4. Vesting Condition
  • Stock Option:
    • ✔ Must satisfy vesting (time/performance)
  • Warrant:
    • ❌ No vesting


✔ 5. Who Gets It
  • Stock Option:
    • Employees only
  • Warrant:
    • Public investors


🔹 3. Key Insight
 
👉 Both are similar because:
 
✔ They give right to buy shares
 
👉 But differ in:
  • Purpose
  • Usage
  • Structure


🔹 Simple Summary
  • Stock option ≈ warrant (in concept)
  • But:
    • Stock option → employee benefit
    • Warrant → investment instrument


🔹 Final Exam Insight
 
👉 “Stock options and warrants are similar in granting the right to purchase shares at a fixed price, but differ in their purpose, issuance, tradability, and target users.”
 

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KembaraXtra – Islamic Derivatives: Option vs Call Option vs Stock Option vs Warrant (Note Form)


🔹 1. Basic Definitions
  • Option (General)
    • Right to buy or sell an asset
    • Includes:
      • Call option
      • Put option


  • Call Option
    • Right to buy shares at fixed price


  • Stock Option (Employee)
    • Right for employees to buy company shares
    • Given as compensation


  • Warrant
    • Right to buy shares from company
    • Issued to investors


🔹 2. Similarities
  • ✔ Right (not obligation)
  • ✔ Fixed price (strike/exercise price)
  • ✔ Expiry period
  • ✔ Profit when price rises (for call-type rights)


🔹 3. Key Differences
 
✔ Nature
  • Option → General term
  • Call option → Type of option (buy only)
  • Stock option → Employee-based call option
  • Warrant → Company-issued right


✔ Who Issues It
  • Option / Call option → Market (investors)
  • Stock option → Company (to employees)
  • Warrant → Company (to investors)


✔ Source of Shares
  • Option / Call option → From other investors
  • Stock option → From company
  • Warrant → From company (new shares created)


✔ Tradability
  • Option / Call option → ✔ Tradable
  • Stock option → ❌ Not tradable
  • Warrant → ✔ Tradable


✔ Purpose
  • Option / Call option → Trading / hedging
  • Stock option → Employee incentive
  • Warrant → Raise capital


🔹 4. Key Insight
 
👉 Think of it like this:
  • Option = big category
  • Call option = type of option
  • Stock option = employee version of call option
  • Warrant = company-issued call-like instrument


🔹 Simple Summary
  • Option → buy or sell right
  • Call option → right to buy
  • Stock option → employee right to buy
  • Warrant → investor right to buy from company


🔹 Final Exam Line
 
👉 “Options are general derivative contracts, call options are rights to buy, stock options are employee-based call rights, and warrants are company-issued rights to purchase newly created shares.”
 

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Published on
KembaraXtra – Islamic Derivatives: Making Money with Stock Options (Note Form)


🔹 1. What is “Spread”?
 
👉 Spread = Stock Price (S) − Strike Price (K)
 
✔ It shows:
  • How much profit per share


✔ Example
  • Strike price (K) = $10
  • Stock price (S) = $25
 
👉 Spread = 25 − 10 = $15 per share


🔹 2. Types of Option Positions


✔ In-the-Money (ITM)
  • Condition: S > K
  • Spread = Positive
 
👉 Option has value
 
✔ Example:
  • S = $25, K = $10 → Profit exists


✔ Out-of-the-Money (OTM)
  • Condition: S < K
  • Spread = Negative
 
👉 Option has no value
 
✔ Example:
  • S = $8, K = $10 → No profit


✔ At-the-Money (ATM)
  • Condition: S = K
  • Spread = 0
 
👉 No gain, no loss


🔹 3. Call vs Put (Simple Logic)
 
✔ Call Option
  • Profit when: S > K
  • Buy low (K), sell high (S)


✔ Put Option
  • Profit when: S < K
  • Sell high (K), buy low (S)


🔹 4. Private vs Public Company Options


✔ Public Company
  • Shares are traded in market
  • Easy to:
    • Sell shares
    • Realize profit


✔ Private Company
  • No active market for shares
 
👉 Profit only when:
  • Company buys back shares
  • IPO happens
  • Company is sold


🔹 5. Key Issue (Private Company)
 
👉 Even if option is profitable:
  • ❗ You may not be able to sell shares immediately
  • Must wait for liquidity event


🔹 6. Key Insight
 
👉 Profit in options depends on:
  • Difference between market price and strike price
  • AND ability to sell the shares


🔹 Simple Summary
  • Spread = S − K
  • ITM → profit
  • OTM → no profit
  • ATM → neutral
  • Private company → profit may be delayed


🔹 Final Exam Insight
 
👉 “The profitability of stock options depends on the spread between the stock price and exercise price, with options being in-the-money, out-of-the-money, or at-the-money, while realization of gains depends on market liquidity.”
 

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KembaraXtra – Islamic Derivatives: Why Share Price Can Rise Even When a Company Makes Losses


🔹 Key Idea
 
👉 Share price is based on future expectations, not just current performance
 
✔ So even if a company makes losses today,
👉 price can rise if investors expect future improvement


🔹 1. Future Growth Expectations 📈
 
👉 Investors care about:
  • Future profits
  • Business expansion
  • New opportunities


🔸 Example
  • Company reports loss today
  • But announces:
    • New technology
    • Expansion plan
 
👉 Investors expect future profit
 
✔ Share price increases


🔹 2. Temporary Loss (Not Serious)
 
👉 Loss may be due to:
  • One-time event
  • Investment in growth
  • Economic downturn
 
👉 Investors think:
  • “This is temporary”
 
✔ So they continue buying


🔹 3. Strong Company Fundamentals
 
👉 Even with losses, company may have:
  • Strong brand
  • Large market share
  • Good management
 
👉 Investors trust long-term potential
 
✔ Demand stays high → price rises


🔹 4. Speculation and Market Sentiment
 
👉 Sometimes price rises due to:
  • Market hype
  • News or rumors
  • Investor optimism
 
❗ This can be risky (closer to speculation)


🔹 5. External Factors
 
👉 Price may rise due to:
  • Industry growth
  • Government support
  • Economic recovery
 
✔ Not just company performance


🔹 6. Simple Case Example
  • Company makes RM1 million loss
 
👉 But:
  • Launching new product
  • Expected high future revenue
 
👉 Investors buy shares
 
✔ Price rises from RM5 → RM7


🔹 Islamic Finance Insight
 
👉 Acceptable if:
  • ✔ Based on real business expectations
  • ✔ Linked to real economic activity
 
❌ Problematic if:
  • Pure speculation
  • No real basis


🔹 Simple Summary
  • Share price ≠ current profit only
  • It reflects future expectations
 
👉 Loss today + strong future → price can rise


🔹 Final Exam Insight
 
👉 “Share prices may increase despite current losses if investors expect future profitability, as valuation is based on anticipated performance rather than present earnings alone.”
 

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Published on
KembaraXtra – Islamic Derivatives: Warrants vs Call Options (Simplified Explanation)


🔹 What is a Warrant?
 
👉 A warrant is a financial instrument that gives the holder:
  • The right (not obligation)
  • To buy shares directly from a company
  • At a fixed price (exercise price)
  • Within a certain time


🔹 Key Features of Warrants
  • Right to buy company shares
  • Issued by the company itself
  • Has:
    • Exercise price
    • Expiry date
    • Number of shares


🔹 Similarity with Call Option
 
👉 Warrants are similar to call options because:
  • Both give the right to buy shares
  • Both have:
    • Fixed price
    • Expiry date
  • Buyer is not obligated


🔹 Case Example (Warrant)
  • Exercise price = RM5 per share
  • Current price = RM7
 
👉 You exercise warrant:
  • Buy at RM5
  • Market value = RM7
 
👉 Profit = RM2 per share ✅


🔹 Key Difference: Warrant vs Call Option
 
🔸 1. Who Issues It?
  • Warrant → issued by the company
  • Call option → created by investors/traders


🔸 2. Where Shares Come From?
  • Warrant:
    • Shares come from the company
    • New shares are created
  • Call option:
    • Shares come from other investors
    • No new shares created


🔸 3. Effect on Company
  • Warrant:
    • Company receives money
    • Number of shares increases
  • Call option:
    • Company not involved
    • No change in total shares


🔹 Important Insight
 
👉 Warrants affect:
  • Company capital
  • Share ownership
 
👉 Call options affect:
  • Only investor trading


🔹 Simple Summary
  • Warrant = company-issued right to buy new shares
  • Call option = market-traded right to buy existing shares
  • Both give right, not obligation


🔹 Shariah Insight (Brief)
  • Warrants:
    • ⚠️ Still debated
    • Must avoid speculation
  • Call options:
    • ❌ Generally not permissible
 

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