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​Islamic Derivatives – Options


A. Definition of Options
  • Options are contracts giving the holder the right (not obligation) to:
    • Buy or sell a specific amount of a security
    • At a fixed price
    • Within a specified time period


B. Key Terms
  • Strike / Exercise Price:
    • Fixed price at which the asset can be bought or sold
  • Expiration Date:
    • Last date to exercise the option
    • Commonly falls on the third Friday of each month
  • Premium:
    • Amount paid to obtain the right to hold the option
  • Contract Size:
    • One option contract represents 100 shares of stock


C. Important Characteristics
  • The option holder:
    • Has a choice, not an obligation
  • Options are:
    • Not issued by the underlying company
    • Traded between investors in the market


D. Main Types of Option Strategies
1. Buying Call
  • Right to buy
  • Used when expecting price increase


2. Buying Put
  • Right to sell
  • Used when expecting price decrease


3. Selling Call
  • Obligation to sell if exercised
  • Used when expecting price to stay same or fall


4. Selling Put
  • Obligation to buy if exercised
  • Used when expecting price to stay same or rise


E. Key Insight
  • Options provide:
    • Flexibility and risk management
  • But also involve:
    • Gharar
    • Maisir


F. Final Takeaway
  • Options give the right to trade at a fixed price in the future
  • Require a premium payment
  • Widely used in markets but controversial in Islamic finance due to uncertainty and speculation

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