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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:
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
👉 Considered similar to taking money without valid exchange
2. Gharar (Excessive Uncertainty)
👉 Shariah prohibits excessive uncertainty in contracts
3. Maisir (Gambling-Like Behavior)
👉 Similar to gambling, which is prohibited
4. No Ownership of Underlying Asset
👉 Violates principle of ownership in trade
5. Trading of Pure Rights
👉 Many scholars do not recognize this as a valid subject of sale
🔹 Any Different Opinions?
👉 Some minority scholars try to justify options using:
But:
🔹 Islamic Alternatives
Instead of options, Islamic finance uses:
🔹 Simple Summary
🔹 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: 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:
👉 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:
👉 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:
👉 Profit = RM500 − premium
✔ Big price decrease → high profit
🔹 Important Comparison
👉 Profit depends on:
🔹 Which One Gives More Profit?
👉 They can give the same profit if price moves equally.
Example:
✔ So they are symmetrical
🔹 The Real Difference
👉 The “more profitable” one is simply the one that matches market direction
🔹 Simple Summary
🔹 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: 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:
Example:
👉 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 profit if price moves a lot (up or down)
🔸 Scenario (Palm Oil 🌴)
👉 Total cost = RM100
👉 You win if the market moves significantly
🔹 3. In One Contract (Rare/Structured)
Some financial products may combine both rights in one contract, but:
🔹 Shariah Perspective (Important)
🔹 Simple Summary
🔹 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: Time Limit & Exercising Call and Put Options
🔹 Is There a Time Limit?
👉 Yes — every option contract has a time limit, called the expiry date.
🔹 When Can You Exercise the Option?
This depends on the type of option:
🔸 1. American Option (Flexible)
👉 So:
✔ You can choose the best time
🔸 2. European Option (Restricted)
👉 Even if prices are favorable earlier:
🔹 Example (Simple)
Call Option:
👉 If market price becomes RM4,500:
Put Option:
👉 If market price drops to RM3,500:
🔹 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
🔹 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: 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
👉 If market price rises to RM4,500:
👉 If market price falls to RM3,800:
🔹 Put Option (Palm Oil Example 🌴)
👉 A put option gives the right to sell palm oil at a fixed price.
🔸 Scenario
👉 If market price falls to RM3,500:
👉 If market price rises to RM4,300:
🔹 Why This Example Is Important
🔹 Simple Summary
🔹 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: 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 🌾)
👉 If market price rises to $130:
👉 If market price falls to $90:
🔹 Put Option (Goods Example)
👉 A put option gives the right to sell goods at a fixed price.
🔸 Scenario (Using Rice 🍚)
👉 If market price falls to $70:
👉 If market price rises to $120:
🔹 Key Idea
🔹 Simple Summary
🔹 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: How a Clearing House Manages Margins (Futures Contracts)
🔹 How It Works (Step-by-Step)
1. Initial Margin (Starting Deposit)
You trade a futures contract → You deposit $1,000 as initial margin.
2. Daily Price Changes (Mark-to-Market)
3. Variation Margin (Daily Adjustment)
4. Maintenance Margin (Minimum Balance)
5. Margin Call (Top-Up Required)
6. Final Settlement
🔹 Simple Summary
The clearing house:
🔹 How It Works (Step-by-Step)
1. Initial Margin (Starting Deposit)
- When you enter a futures contract, you must deposit an initial margin.
- This is not a payment for the asset — it’s a guarantee.
- The clearing house holds this money.
You trade a futures contract → You deposit $1,000 as initial margin.
2. Daily Price Changes (Mark-to-Market)
- At the end of each day, the clearing house checks the market price of the contract.
- Profits and losses are calculated daily.
- In your favor → money is added to your account
- Against you → money is deducted
3. Variation Margin (Daily Adjustment)
- The daily gain or loss is called variation margin.
- The clearing house updates your account every day.
- Day 1: You lose $100 → your balance becomes $900
- Day 2: You gain $50 → balance becomes $950
4. Maintenance Margin (Minimum Balance)
- The clearing house sets a minimum level called maintenance margin.
- If your balance falls below this level, action is required.
- Maintenance margin = $800
- Your balance drops to $750 → below the limit
5. Margin Call (Top-Up Required)
- If your balance is too low, the clearing house issues a margin call.
- You must deposit more money to bring it back to the initial level.
- Your position may be closed automatically to prevent further loss.
6. Final Settlement
- When the contract ends, the remaining balance is returned (after all gains/losses are settled).
🔹 Simple Summary
The clearing house:
- collects a deposit (margin)
- updates it daily based on price changes
- asks for more money if needed (margin call)
- ensures all traders can meet their obligations
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KembaraXtra-Islamic Derivatives -What is a Clearing House?
A clearing house is an organization that stands in the middle of a futures contract between the buyer and the seller. Instead of the two parties dealing directly with each other, the clearing house becomes the buyer to every seller and the seller to every buyer.
In the context of Islamic derivatives or futures contracts, the clearing house plays a similar role but must operate in a way that follows Shariah principles (such as avoiding excessive uncertainty and ensuring fairness).
Main Functions of a Clearing House
1. Guarantees the Contract
2. Reduces Counterparty Risk
3. Manages Margins (Security Deposits)
4. Settles Transactions
5. Monitors Trading Activities
6. Maintains Market Stability
Simple Summary
A clearing house is like a trusted middleman that:
A clearing house is an organization that stands in the middle of a futures contract between the buyer and the seller. Instead of the two parties dealing directly with each other, the clearing house becomes the buyer to every seller and the seller to every buyer.
In the context of Islamic derivatives or futures contracts, the clearing house plays a similar role but must operate in a way that follows Shariah principles (such as avoiding excessive uncertainty and ensuring fairness).
Main Functions of a Clearing House
1. Guarantees the Contract
- Ensures both parties fulfill their obligations.
- Reduces the risk of one party failing to pay or deliver.
2. Reduces Counterparty Risk
- Since the clearing house is in the middle, traders don’t have to worry about the other party defaulting.
3. Manages Margins (Security Deposits)
- Requires traders to deposit funds (margin) to cover potential losses.
- This ensures financial stability in the market.
4. Settles Transactions
- Handles payments and delivery of goods (or cash settlement).
- Makes sure trades are completed smoothly.
5. Monitors Trading Activities
- Supervises the market to ensure rules are followed.
- Maintains a fair and transparent trading system.
6. Maintains Market Stability
- By managing risk and ensuring solvency, it helps prevent market disruptions.
Simple Summary
A clearing house is like a trusted middleman that:
- makes sure trades are completed,
- reduces risk,
- and keeps the market safe and organized.
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KembaraXtra-Islamic Derivatives- Introduction
Futures contracts are agreements that allow producers and businesses to set prices for goods before they are delivered. This helps reduce different types of risk in trade.
These contracts also support better planning in agriculture, industry, and commerce. In addition, they make it easier to handle large volumes of trade.
According to Kamali (1999), trained brokers and agents usually help complete these contracts by following strict market rules in a controlled system. To ensure the contracts are reliable, a clearinghouse supervises trading activities and makes sure all traders can meet their obligations (Khan, 1988).
Futures contracts are agreements that allow producers and businesses to set prices for goods before they are delivered. This helps reduce different types of risk in trade.
These contracts also support better planning in agriculture, industry, and commerce. In addition, they make it easier to handle large volumes of trade.
According to Kamali (1999), trained brokers and agents usually help complete these contracts by following strict market rules in a controlled system. To ensure the contracts are reliable, a clearinghouse supervises trading activities and makes sure all traders can meet their obligations (Khan, 1988).
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