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Islamic Derivatives – Options Contracts
Basic Concept of Options
Types of Options
1. Call Option (Right to Buy)
2. Put Option (Right to Sell)
Example – Call Option (A)
Example – Put Option (B)
Key Takeaways
Basic Concept of Options
- An option contract gives the buyer:
- Right (not obligation) to buy or sell an asset
- At a fixed price
- On or before a future date
- Buyer must pay a premium:
- Fee paid to seller for this right
- Loss is limited to this premium amount
Types of Options
1. Call Option (Right to Buy)
- Gives buyer the right to purchase an asset
- Price is fixed in advance
- Used when expecting price increase
- If price rises → buyer profits
- If price falls → buyer lets option expire (loss = premium only)
2. Put Option (Right to Sell)
- Gives buyer the right to sell an asset
- Price is fixed in advance
- Used when expecting price decrease
- If price falls → buyer sells at higher fixed price → profit
- If price rises → buyer lets option expire (loss = premium only)
Example – Call Option (A)
- A expects stock price to increase
- Choices:
- Buy stock fully, or
- Pay premium for call option
- If price rises:
- A benefits
- If price falls:
- A does not exercise option
- Loss = premium only
Example – Put Option (B)
- B expects stock price to decrease
- Choices:
- Sell stock now, or
- Buy put option
- If price falls:
- B sells at fixed higher price → profit
- If price rises:
- B lets option expire
- Loss = premium only
Key Takeaways
- Options = right without obligation
- Premium = cost of flexibility
- Helps manage risk and speculation
- Widely used in financial markets, but raises Shari’ah concerns (ownership, uncertainty, speculation)
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