Assalamualaykum everyone. I have a few questions regarding stock options and inverse etfs. I know shorting the market is haram and riba is not allowed but what if there are inverse etfs that follow the market short but you only buy shares. For example a halal stock such as TSLA has an inverse etf that is 1:1 in percentage movement so no leverage and you can purchase it as you would regular shares. It follows tsla as it goes down. So is this instrument haram even though we aren’t shorting it ourselves? And even if we use this instrument to hedge risk is it still considered haram? Also are stock options completely impermissible even with regards to hedging risk? Are naked options absolutely impermissible?
Would really appreciate your input
@Mufti_Faraz_Adam
Wa alaykum salaam,
Many a time, inverse ETFs use futures, options and swaps to give exposure to the inverse gains.
Futures Contracts: Inverse ETFs can use short positions in index futures contracts to gain inverse exposure to the index. When the ETF manager sells a futures contract, they are agreeing to deliver the underlying asset (in this case, the index) at a specified future date at an agreed-upon price. If the index declines, the short futures position will increase in value, resulting in a gain for the ETF.
Options: Inverse ETFs can also use options contracts, such as put options, to achieve inverse exposure. A put option gives the ETF manager the right, but not the obligation, to sell the underlying index at a specified price (strike price) before the expiration date. If the index declines, the value of the put options will increase, leading to gains for the ETF.
Swaps: Swaps are another common instrument used by inverse ETFs. An ETF manager can enter into a total return swap agreement with a counterparty (usually a financial institution). In a total return swap, the ETF manager agrees to pay the counterparty the positive return of the underlying index in exchange for the inverse return of the index. If the index declines, the ETF manager will receive the inverse return, resulting in gains for the ETF.
Using these derivatives will not be Sharia Compliant.
Likewise, stock options, naked or otherwise, are not Sharia Compliant. Selling options involves selling a choice. Scholars do not consider the sale of a choice as a valid transaction. A transaction requires an exchange, where each party gives something to the other. If you are buying your choice, you already have a choice, the other party is not giving you anything. As such, it is not a valid exchange.
Allah knows best