Futures and options are contracts whose value depends on the price of something else: a share, an index, a commodity or a currency. They are traded in huge volumes, and many new investors are drawn to them. The great majority of contemporary scholars consider conventional futures and options impermissible. This article explains why.
What they are
- A future is an agreement to buy or sell something at a fixed price on a future date. In practice, most futures are closed before that date, and only the price difference is settled.
- An option gives the buyer the right, but not the obligation, to buy or sell at a fixed price, in exchange for a premium paid up front.
Why scholars object
Sale of what you do not own. A sale in Islamic law requires the seller to own, or be able to deliver, what is sold. Futures typically sell something neither party holds, with delivery postponed on both sides.
Deferring both sides. When both the price and the goods are deferred, it is a sale of a debt for a debt, which classical scholarship does not permit.
The option premium. An option's premium buys a bare right, not an asset, a benefit or a service. Scholars have held that such a right cannot be sold on its own.
Gharar and maysir. Because most contracts are settled only by the price difference, they function as bets on price movement: one side's gain is the other's loss.
What the major bodies have said
The International Islamic Fiqh Academy of the OIC, in its 1992 resolution on financial markets, held that option contracts as practised in financial markets are not permissible, and that futures in their conventional form are not permissible either. AAOIFI's Shariah standard on the sale of commodities in organised markets takes the same position on conventional futures and options.
Permissible alternatives
Islamic finance has its own forward-looking contracts, used under scholarly supervision:
- Salam: the full price is paid now for a clearly specified commodity delivered later.
- Istisna': an order to manufacture or build something, with payment that can be staged.
- Arboun: a down payment on a purchase, kept by the seller if the buyer does not go ahead, which the Fiqh Academy accepted with conditions.
For most individual investors, the simplest halal path remains owning shares in compliant companies outright, for the long term.