Are DeFi options Shariah-compliant?

Options have become one of the most popular yield-generating strategies in decentralised finance (DeFi). Whether executed manually on an options exchange or automated through smart contracts, these strategies allow users to sell calls, puts, or more complex combinations to earn premiums.

For Muslim investors, this raises an important question: are these contracts Shariah-compliant?

In traditional finance, scholars have long debated the permissibility of options contracts, particularly those found in equity markets. However, very little has been written specifically about DeFi-based options and their underlying structures. In this article, we first review the opinions of scholars on options in general. We then examine whether and how those rulings can be applied to on-chain options products offered in the DeFi space today.

This distinction is crucial: the scholarly views cited were not given in the context of blockchain-based smart contracts, but we aim to apply their principles and conditions to evaluate modern DeFi applications.

Three Scholarly Opinions on Options

1. The majority view: prohibition: The International Islamic Fiqh Academy and most contemporary scholars forbid options outright. They argue that options involve gharar (excessive uncertainty) and maysir (gambling), the seller may not own the asset at the time of the contract, and most options settle by cash difference rather than actual delivery, making them closer to a bet on price movement than a genuine trade.

2. The permissive view: Scholars including Dr. Ahmed Suleiman, Dr. Mohammed Abdul Ghaffar Al-Sharif, Mohammed Ali Al-Qari, Mohammed Hashim Kamali, and Dr. Mustafa Abdul Ghaffar Abbas consider options permissible. They argue that an option is a recognised financial right that can be sold for a premium, similar to khiyar al-sharṭ (stipulated option) and arboun (earnest money) in classical fiqh. They do not distinguish between American and European styles but require that the underlying asset be halal and the contract terms clear.

3. The conditional view A middle position, supported by some scholar such as Dr Yousef Al Shubaily , allows only American-style options under strict conditions:

• The underlying must be Shariah-compliant

• The option must be exercisable any time during the contract period (not just at expiry)

• Exercise must lead to actual delivery of the underlying asset

• The asset must be deliverable and fully collateralised during the period

DeFi Options Strategies Explained

The main strategies in DeFi mirror those in traditional finance. Whether executed manually or through an automated smart contract, the economic logic is the same, and the Shariah ruling applies to the contract itself, not the platform.

1. Covered Calls Users deposit a token they already own (e.g. ETH), and the protocol sells call options on their behalf. Example: A user deposits 1 ETH into a covered call vault such as Ribbon Finance. The vault sells a call option with a $4,000 strike price expiring in one week. If ETH stays below $4,000, the user keeps the ETH and the premium. If ETH rises to $4,500, the ETH is sold at $4,000 and the user receives the strike price plus the premium.

2. Cash-Secured Puts Users deposit stablecoins, and the protocol sells put options. Example: A user deposits $3,000 USDC into a put-selling vault. The vault sells a put option on ETH with a $2,800 strike price. If ETH stays above $2,800, the user keeps the stablecoins and premium. If ETH drops to $2,500, the vault uses the USDC to buy ETH at $2,800, fulfilling the option contract.

3. Straddles and Strangles Both a call and a put are sold (straddle = same strike; strangle = different strikes), generating income from premiums as long as price remains in a certain range. Example: A vault sells a strangle on ETH by selling a call at $4,500 and a put at $3,500. The strategy profits if ETH stays between $3,500 and $4,500. A strong move outside that range leads to losses.

4. Rolling Strategies Protocols automatically re-open option positions each week or epoch, compounding yield. Example: A platform rolls covered call positions every Thursday, taking last week’s premium and reusing the same collateral to sell a new option for the following week.

5. Tokenised Option Vaults Depositors receive a token representing their share of the strategy, which can often be traded or used elsewhere in DeFi. Example: A user deposits into a Ribbon covered call vault and receives rETH-THETA tokens representing their share. They could, in theory, use these tokens as collateral in another protocol.

6. Perpetual Options Options with no expiry, continuously repriced using funding rates. Example: A user buys a perpetual call on ETH via Panoptic. There is no expiry date; instead, a funding rate is paid to the seller to maintain the position, making it behave like a perpetual swap rather than a traditional option.

7. NFT-Based Options The option contract itself is minted as an NFT, which can be transferred or sold. Example: An option to buy 10,000 USDC for 1 ETH is minted as a unique NFT. The holder can sell this NFT on OpenSea to another user, transferring the right.

8. Composable Structured Products Portfolios combining options with lending yields or liquidity provision fees. Example: A product lends the user’s ETH on a lending protocol to earn interest, then uses the interest-bearing position as collateral to sell covered calls, stacking income sources.

9. Other Exotic Strategies Advanced option combinations or volatility-harvesting mechanisms designed for professional traders. Example: A protocol executes a “butterfly spread” (buying 1 call at $3,500, selling 2 calls at $4,000, buying 1 call at $4,500), profiting if ETH stays near $4,000 but losing if the price moves too far in either direction.

Having explained the key strategies used in DeFi options, the next step is to assess how they align with established Shariah principles. By applying the three major scholarly views outlined earlier, we can evaluate whether each type of option strategy meets the conditions of permissibility. The table below presents the AmanX screening of popular DeFi option products accordingly:

DeFi brings powerful tools, but in Shariah the ruling follows the contract, not the code. On options, scholars split three ways: the majority prohibit them outright (gharar, maysir, sale of what is not owned, cash-difference settlement); a minority regard them as a sellable right if the underlying is halal and terms are clear (by analogy to khiyar al-sharṭ or arboun); a middle view allows only narrowly framed structures for genuine hedging, with ownership or full collateral at inception and delivery of the underlying at exercise.

Measured against these benchmarks, many current DeFi option vaults do not qualify: they are typically European-style, cash-settled, and built for speculative payoff profiles. Even under the permissive view, secondary trading of the “right,” cash settlement, and unclear on-chain ownership remain unresolved.

Bottom line: until products verifiably deliver real assets, maintain full collateral, and serve a clear hedging purpose, they are impermissible under the majority view and practically non-compliant under the conditional view. Investors seeking Shariah adherence should avoid today’s DeFi options unless and until independent review confirms they meet those strict conditions.

Looking to design Shariah-aligned options? AmanX can help assess and structure compliant pathways.