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Islamic Derivatives – Making Money with Stock Options (Rewritten with Call & Put)
A. Key Terms
B. Spread (Profit Concept)
C. Example
D. Option Status (Moneyness)
1. Call Option (Right to Buy)
2. Put Option (Right to Sell)
E. Profit Logic Summary
F. Public vs Private Company Options
Public Company
Private Company
G. Key Insight
H. Shari’ah Reflection
Final Takeaway
If you want, I can compress this into a super short exam answer (5 lines) 👍
A. Key Terms
- S (Stock Price) = Current market price of the share
- K (Strike Price) = Fixed price in the option contract
- Spread = Difference between market price and strike price
B. Spread (Profit Concept)
- For Call Option:
- Spread = S − K
- For Put Option:
- Spread = K − S
C. Example
- K = $10
- S = $25
- Call option:
- Spread = 25 − 10 = $15 profit
- Put option:
- Spread = 10 − 25 = −$15 (no profit, not exercised)
D. Option Status (Moneyness)
1. Call Option (Right to Buy)
- In-the-Money (ITM):
- S > K
- ✔️ Profit (buy cheap, sell high)
- At-the-Money (ATM):
- S = K
- No profit, no loss
- Out-of-the-Money (OTM):
- S < K
- ❌ Not worth exercising
2. Put Option (Right to Sell)
- In-the-Money (ITM):
- S < K
- ✔️ Profit (sell high, market low)
- At-the-Money (ATM):
- S = K
- No profit, no loss
- Out-of-the-Money (OTM):
- S > K
- ❌ Not worth exercising
E. Profit Logic Summary
- Call option:
- Profit when price rises (S > K)
- Put option:
- Profit when price falls (S < K)
F. Public vs Private Company Options
Public Company
- Shares:
- Easily traded in market
- Employee can:
- Exercise option → sell immediately → profit
Private Company
- Shares:
- Not easily tradable
- Profit depends on:
- Company buyback, or
- Events like:
- IPO
- Company sale
G. Key Insight
- Profit depends on:
- Relationship between S and K
- But actual cash profit depends on:
- Ability to sell shares
H. Shari’ah Reflection
- Options involve concerns such as:
- Gharar
- Maisir
Final Takeaway
- ✔️ Call = profit when S > K
- ✔️ Put = profit when S < K
- ✔️ Spread determines profit
- ❗ Liquidity determines whether profit can actually be realized
If you want, I can compress this into a super short exam answer (5 lines) 👍
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