Does anyone know of any write-ups on “covered calls” in investing?

Bismillahi Ta’ala

Walaikum Assalam Warahmatullah

Mufti Faraz Adam was was asked about covered call options. Hereunder is his response which I concur with.

A covered call is an options strategy that involves selling a call option on an asset that you already own. The call option is ‘covered’ by the existing long position, as should the buyer (holder) of the call option decide to exercise the contract, you could deliver the security in question.

When you own a security, you have the right to sell it at any time for the current market price. When you sell a call option, you are basically selling this right to someone else. The holder of your call option would have the right to buy your security on the option’s expiry date for a predetermined price – called the strike price.

In return for taking on the risk of selling an option, you’d be paid a premium. This cash fee is paid on the day the options contract is sold – it is paid regardless of whether the buyer exercises the option.

From a Shariah perspective, selling the option itself in the financial markets is problematic even though you may own the corresponding shares. You will be selling the option and earning from something which in and of itself is not a valuable item in Shariah.

Wallahu A’lam

And Allah Ta’āla Knows Best
Mufti Faisal al-Mahmudi