I have done some readings on naked calls & puts, and realize that the majority of scholars disapprove of their transactions. To my understanding, it seems that the reasoning is due to the fact that options are just transactions of risk with no underlying asset ownership.
However, with covered call options, I would be owning the 100 shares while selling the contract for a fee/percentage; hence I do have ownership of the asset. Would this make selling contracts on shares that I own halal? Any advice on this would be much appreciated!
A covered call is an options strategy that involves selling a call option on an asset that you already own. The call option is ‘covered’ by the existing long position, as should the buyer (holder) of the call option decide to exercise the contract, you could deliver the security in question.
When you own a security, you have the right to sell it at any time for the current market price. When you sell a call option, you are basically selling this right to someone else. The holder of your call option would have the right to buy your security on the option’s expiry date for a predetermined price – called the strike price.
In return for taking on the risk of selling an option, you’d be paid a premium. This cash fee is paid on the day the options contract is sold – it is paid regardless of whether the buyer exercises the option.
From a Shariah perspective, selling the option itself in the financial markets is problematic even though you may own the corresponding shares. You will be selling the option and earning from something which in and of itself is not a valuable item in Shariah.
Asssalamu Walaikum,
In the finance world covered call has commercial value as it allows the buyer to lock in a price at a price point without taking the risk of 100% of the capital to buy the stock for a certain period of time.
Thanks
If I own a house and someone come and pays me deposit to sell my house and we agreed on a selling date, this would be halal in Islam. If the buyer changed his mind, I keep the deposit. So what is the different from selling covered calls?
A call is not a deposit related to an installment payment like you have for a house. It’s a hedge or risk reduction tactic that you want in place in case you want to buy shares of a stock at a certain price before or by a certain date.
As to why someone didn’t purchase the underlying asset, there could be a number of reasons like they:
Didn’t have the money to purchase before or by the expiration date
Bought the shares of the stock in the market or got it somewhere else (ex: RSU or ESPP) for cheaper
Realized that the value of the shares weren’t going to go up over time and it wasn’t worth buying at all
See the price isn’t that high above the strike or it didn’t go past it so the shares aren’t worth purchasing at all
If you are selling a covered call, then you are offsetting your risk for owning the shares of the stock. You’re not entirely certain if the true value of the company will ever be realized by the market so you can sell a call on your shares to get some money out of what you own and protect yourself from a loss on your initial investment.
If someone executes the call, then they are purchasing the shares you own. In the end, you will still get compensated for your shares.
The covered call strategy is not bearish strategy, it is not a hedge for stock you think will drop in value. It is a strategy for neutral or bullish stocks.
As a seller of covered call, I can at any time buy it back and close the deal. I am not at the mercy of my coutner-party. Also, exercising options at expiry is not entirely true either b/c that is a European style option. We use American-style options where buyer can exercise anytime from the time of purchase to expiry.
As I said earlier, I can buy my contract back from the market maker and close the trade at any time. The rules of Options trading were modified after 2008 financial disaster. Before that option buyer and option seller were paired. So, if there is a liquidity risk, you are can’t get out. That is not the case anymore. Now, we have market maker as the last resort, even if there is no liquidity. I never traded options before 2008, so, I don’t know how things were back then. Now, you can buy your contract back or sell your contract to the market maker at anytime.