The following question and answer by Sheikh Yusuf Talal DeLorenzo attendees of the Dow Jones University Courses on Islamic Investement.Question:: What is the Islamic view on employee stock options?Answer: This is one which many Muslims puzzle over, and with good reason. To begin with, the term "options" often leads to confusion because most Muslims recognize it as perhaps having to do with the options market; and the buying and selling of options is clearly prohibited owing to the element of uncertainty, or gharar, at the time of contracting. (For a detailed discussion of gharar, see: "Lesson Two, Riba and Gharar").Secondly, people may have questions about the way a typical corporate stock option actually works. I'll outline the general idea below: In order to reward performance, or to motivate employees to work harder, the company willoffer an employee the option of 100 shares at a set price (strike price) which is usually not the same as the market price. Generally, the offer will be valid for a certain period of time (exercise period), a number of years or a number of days from the time an employee leaves the company. The employee can:
- Do nothing - the employee pays nothing and receives nothing.
- Exercise the option by buying the shares and selling them at market value, gaining the difference, less commissions, in cash.
- Buy all shares at the strike price, and keep them for the future.
- Sell enough of the shares at market price to and keep the rest of the shares for the future.