Options

An option is a contractual agreement that grants the option holder the right to purchase or sell a financial asset at a predetermined fixed price on a specific date or time, in exchange for a premium, without incurring any obligation. There are two types of options – call and put options, and they are classified based on their maturity into two categories – European and American options. European options provide the option holder with the right to exercise the option solely at the expiry date, whereas American options provide the option holder with the right to exercise the option at any point until the expiry date. The main aim of this contract is to grant the party seeking to enter into an agreement a specific period to contemplate it and to avoid anyone else from entering into a similar agreement during that period. Option contracts were first used in the USA during the Civil War in the 1860s. In Arabic literature, the term most frequently used for options is “al-amaliyyat al-shartiyyat al-ajilah,” which translates to contingent futures. The transactions surrounding options are considered controversial by some Islamic jurists in regard to Islamic law. The option contracts are considered religiously objectionable due to their speculative nature, absence of real assets traded, and receipt of the option premium.