Category:
Fatwa#: 39143
Asked Country: Pakistan

Answered Date: Nov 17,2017

Title: Binary option trading

Question

Assalmo Alikum. IM Abdul Jamal Ahmed. I want to know about binary option trading. in this trading a person predict that if the currency goes up in next 1 minute to 1 day then then i will buy and if my prediction is correct i get a percentage of profit on my investment.and vice versa in selling. the main thing is that there is a time for our prediction let suppose if i buy a currency in one rate then i predict it goes up in next 10 or 30 minutes and if the market is above from that purchased line in within 10 to 30 minutes then i win and i get profit . please celrify that is it Halal in Islam? JazakAllah Khair

Answer

In the Name of Allaah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

Introduction:

Binary options trading is a financial trading method in which there are only two possible outcomes, one or the other (1 or 0), hence the name binary. The premise of binary options trading is that you, the trader, guess if the asset will increase or decrease in value by the time the position expires. If you were right, you take away the profit and if not, you lose your investment minus a small percentage that remains in your account. It is either a fixed risk or a fixed reward[1].

Hereunder are some important terminologies of binary transactions:

  1. Call option[2] is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period.
  2. Put option[3] is an option contract giving the investor the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.

The call and put options are gambles purchased from the broker and their price will depend on the risk; the higher the risk, the higher the price. The price of the two will be mutually agreed upon between the broker and the investor. An investor purchases a chance based on his assumption.

Call option and put option are two opposites. The buyer benefits through the call option while the seller benefits through the put option.

Every option settles at $100 or $0, $100 if the bet is correct, $0 if it is not.

  1. Spot price is the price of the initial price of the asset prior to entering into the investment agreement.
  2. Strike price is the expected price upon which the investment is placed.
  3. Expiry or expiration date is the time on which the expected investment is based. One will come to know of his gain or loss at this time.

One enters a binary option through a broker. Brokers are either licensed or unlicensed. Licensed brokers make money from the loss of investors, i.e. when using binary options, either the trader or the broker will make money. Another method used by licensed brokers to make money is offering traders a bonus to help them start trading. These bonuses usually come with certain conditions which the traders tend to generally ignore. Hence, it is essential that one reads the terms and conditions of any agreement or contract.

Here is an example of a typical binary call options trade[4].

Zaid decides to invest in binary options. He approaches Fuloos Brokers to invest in crude oil. At that time, the spot price of the crude oil was $92.93. Zaid, the trader thinks that crude oil will be $93 or more at 3:30 p.m. He can buy a call option on that outcome from the broker. The price of the call option will be mutually agreed upon between the broker and the investor. Since Zaid believes the price will increase, he buys 10 call options for crude oil from the broker at or above $93 at a cost of $40 for each call option.

Zaid’s gross profit/loss follows the ‘all or nothing’ principle. If he wins, then for each call option, he gets $100, and if he loses, he will lose his $400.

If the crude oil strike price closes at or above $93 at 3:30 p.m., Zaid’s net profit will be the payoff at expiry minus the cost of the option; the cost of the options purchases was $400. He won the bet, hence he earned $1000: $1000 – $400 = $600. He will earn $600.

 

Here is an example of a typical binary put options trade[5].

Bakr decides to invest in binary options. He approaches Star Brokers to invest in crude oil. At that time, the spot price of the crude oil was $92.93. Bakr, the trader thinks that crude oil will be $92.50 or less at 3:30 p.m. He can purchase a put option on that outcome from the broker. The price of the put option will be mutually agreed upon between the broker and the investor. Since Bakr believes the price will decrease, he buys 10 put options for crude oil from the broker at or below $92.50 at a cost of $40 each (each put option).

Bakr’s gross profit/loss follows the ‘all or nothing’ principle. He can lose all the money he invested, which in this case is $40 x 10 = $400 ($40 for each put option x 10 shares), or make a gross profit of let’s say $90 x 10 = $900.

 

This will be purchased from the broker.

 

 

 

 

Conclusion:

In the binary option of trading, one enters into a contract that is based upon uncertain future events (gharar) and gambling. Therefore, such contracts and transactions will be impermissible[6].

Consider the following Hadith of Sayyiduna Abu Hurairah (Radhiyallaahu ‘anh):

نهى رسول الله صلى الله عليه وسلم عن بيع الحصاة، وعن بيع الغرر[7] 

Translation: “Rasulullaah (Sallallaahu ‘alaihi wasallam) forbade transactions determined by throwing stones, and transactions which involve uncertainty.”

 

And Allaah Ta’aala Knows Best

Muajul I. Chowdhury

 

Student Darul Iftaa

New York, USA     

 

Checked and Approved by,
Mufti Ebrahim Desai.

 



[2] A call option is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period.

It may help you to remember that a call option gives you the right to call in, or buy, an asset. You profit on a call when the underlying asset increases in price. (http://www.investopedia.com/terms/c/calloption.asp)

A Call Option is security that gives the owner the right to buy 100 shares of a stock or an index at a certain price by a certain date. That "certain price" is called the strike price, and that "certain date" is called the expiration date. A call option is defined by the following 4 characteristics:

 

[3] A put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares. (http://www.investopedia.com/terms/p/putoption.asp)

A put option is a security that you buy when you think the price of a stock or index is going to go down. More specifically, a put option is the right to SELL 100 shares of a stock or an index at a certain price by a certain date. That "certain price" is known as the strike price, and that "certain date" is known as the expiry or expiration date. (http://www.call-options.com/what-are-put-options.html)

[6]  الهداية في شرح بداية المبتدي (3/ 44)

لنهي النبي عليه الصلاة والسلام عن بيع الحبل وحبل الحبلة ولأن فيه غررا.

 

البناية شرح الهداية (8/ 148)

م: (ولأن فيه غررا) ش: أي ولأن في بيع الحمل والنتاج غررا أي خطرا الذي لا يدري ليكون أم لا

 

العناية شرح الهداية (6/ 411)

قال المغرب في الحديث: «نهى عن بيع الغرر» : وهو الخطر الذي لا يدري أيكون أم لا..... والغرر منهي عنه

 

البحر الرائق شرح كنز الدقائق (6/ 80)

والبيع فيهما باطل لنهي النبي - صلى الله عليه وسلم - عن بيع الحبل وحبل الحبلة، ولما فيه من الغرر

 

حاشية الشلبي على كنز الدقائق (4/ 44)

 لأن الضرر منفي شرعا وإن لم يكن فيه ضرر جاز

 

[7]  صحيح مسلم (3/ 1153)

(1513) وحدثنا أبو بكر بن أبي شيبة، حدثنا عبد الله بن إدريس، ويحيى بن سعيد، وأبو أسامة، عن عبيد الله، ح وحدثني زهير بن حرب، واللفظ له، حدثنا يحيى بن سعيد، عن عبيد الله، حدثني أبو الزناد، عن الأعرج، عن أبي هريرة، قال: «نهى رسول الله صلى الله عليه وسلم عن بيع الحصاة، وعن بيع الغرر»

DISCLAIMER - AskImam.org questions
AskImam.org answers issues pertaining to Shar'ah. Thereafter, these questions and answers are placed for public view on www.askimam.org for educational purposes. However, many of these answers are unique to a particular scenario and cannot be taken as a basis to establish a ruling in another situation or another environment. Askimam.org bears no responsibility with regards to these questions being used out of their intended context.
  • The Shar's ruling herein given is based specifically on the question posed and should be read in conjunction with the question.
  • AskImam.org bears no responsibility to any party who may or may not act on this answer and is being hereby exempted from loss or damage howsoever caused.
  • This answer may not be used as evidence in any Court of Law without prior written consent of AskImam.org.
  • Any or all links provided in our emails, answers and articles are restricted to the specific material being cited. Such referencing should not be taken as an endorsement of other contents of that website.