Question:

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?

The Fatwa

In the Name of Allah, the Most Gracious, the Most Merciful

The Answer

The Fiqh of the Answer

An inverse ETF, also known as a “Short ETF” or “Bear ETF”, is an exchange traded fund (ETF) constructed by using various derivatives to profit from a decline in the value of an underlying benchmark. Investing in inverse ETFs is similar to holding various short positions, which involve borrowing securities and selling them with the hope of repurchasing them at a lower price.[1]

Inverse ETFs typically use derivatives, such as daily futures contracts, to produce their daily inverse returns. This introduces one of the primary benefits of inverse ETFs, which is that they allow investors to make bets that a benchmark will decline without having to directly purchase derivatives. 

In the case of inverse ETFs, the futures contracts held by the fund are betting that the price of the benchmark will go down. If successful, the shareholders of the inverse ETF will profit. But if the benchmark asset or security rises in price, the inverse ETF will decline. [2]

Options are a form of derivative contracts which entails an agreement between two parties to facilitate a potential transaction on an underlying security at a pre-set price, referred to as the strike price, prior to or on the expiration date. A naked option is a variation of an option contract where the seller does not own the underlying asset/security required to meet the potential obligations that would arise from the option being exercised.

Inverse ETFs, whether leveraged or not, are made up of derivatives contracts. Derivative contracts, including options,are prohibited in terms of Islamic law due to containing some or all of the following elements:

1. Promises converted into sales without offer and acceptance
2. Sale that is executable on a future date
3. The absence of subject matter for a valid sale
4. Gharar Fahish (excessive uncertainty)
5. Maysir (gambling)
6. Riba (Interest)

AAOIFI Shariah Standard No. (20) prohibits derivatives on the basis that they constitute binding promises that are converted into sale contracts pertaining to the future without offer and acceptance. It prohibits options on the basis that the subject-matter of the contract does not satisfy the Shariah requirements.

Mufti Taqi Uthmani (Hafizahullah) states in his Fiqhul Buyu’ that the seller in options contracts does not deliver any recognized asset to the purchaser, nor does he transfer any financial right, which means that options contracts fall under the purview of consuming the wealth of people through illicit means. He further expresses that these contracts resemble gambling more than they do trading given that the seller of the option does not own the commodity that he committed to sell, and he only entered into this arrangement on the basis of future predictions regarding the commodity price, essentially speculating on the price movement.

And Almighty Allah Alone Knows Best 

Maulana Safwaan Navlakhi
Trainee Mufti

Reviewed and approved by
Mufti Faraz Adam
Darul Iftaa Muadh ibn Jabal
www.darulfiqh.com 

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[1] https://www.investopedia.com/terms/i/inverse-etf.asp

[2] https://www.etf.com/etf-education-center/etf-basics/what-inverse-etf

وأما الذي يرجع إلى نفس العقد فهو أن يكون القبول موافقا للإيجاب بأن يقبل المشتري ما أوجبه البائع و بما أوجبه… و أما الذي يرجع إلى المعقود عليه فأنواع (منها) أن يكون موجودا … و (منها) أن يكون مالا لأن البيع مبادلة المال بالمال… و (منها) أن يكون مملوكا لأن البيع تمليك فلا ينعقد فيما ليس بمملوك… و (منها) و هو شرط انعقاد البيع للبائع أن يكون مملوكا للبائع عند البيع فإن لم يكن لا ينعقد و إن ملكه بعد ذلك بوجه من الوجوه إلا السلم خاصة…و (منها) الخلو عن الشروط الفاسدة وهي أنواع …(ومنها) شرط الأجل في المبيع العين والثمن العين وهو أن يضرب لتسليمها أجل لأن القياس يأبى جواز التأجيل أصلا لأنه تتغير مقتضى العقد…  (بدائع الصنائع)

ولا خلاف بين أهل العلم في تحريم القمار (أحكام القرأن للجصاص)

باب بُطْلاَنِ بَيْعِ الْحَصَاةِ وَالْبَيْعِ الَّذِي فِيهِ غَرَرٌ ‏‏
وَحَدَّثَنَا أَبُو بَكْرِ بْنُ أَبِي شَيْبَةَ، حَدَّثَنَا عَبْدُ اللَّهِ بْنُ إِدْرِيسَ، وَيَحْيَى بْنُ سَعِيدٍ، وَأَبُو أُسَامَةَ عَنْ عُبَيْدِ اللَّهِ، ح وَحَدَّثَنِي زُهَيْرُ بْنُ حَرْبٍ، – وَاللَّفْظُ لَهُ – حَدَّثَنَا يَحْيَى بْنُ سَعِيدٍ، عَنْ عُبَيْدِ اللَّهِ، حَدَّثَنِي أَبُو الزِّنَادِ، عَنِ الأَعْرَجِ، عَنْ أَبِي هُرَيْرَةَ، قَالَ نَهَى رَسُولُ اللَّهِ صلى الله عليه وسلم عَنْ بَيْعِ الْحَصَاةِ وَعَنْ بَيْعِ الْغَرَرِ (الصحيح لمسلم)