An Islamic finance alternative to option contracts (conventional options). By definition, it is a shari’ah compliant form of contract which is structured the concept of khiyar al-shart (khiyar al-naqd) or arbun/ urboun. In general, khiyar is a contract option in Islamic law that provides an alternative to a conventional option as it gives a party or all parties to a contract an unconstrained right to (abstract or pure right) to walk away from an otherwise binding contract (aqd mulzim). The grantor of such an option is not allowed by shari’ah to sell it in return for a compensation (iwadh). This option can be tied to movements of some underlying price (stock price, commodity price, etc.) or to specific events. It can be used as a call option in the case of the buyer of a commodity or as a put option in the case of the seller. However, there are two major issues that may render this option impractical in use: (1) the premium or compensation to be given by the buyer to the seller of right (haqq) and (2) tradability of the option separately from the underlying asset.

On the other hand, arbun/urboun (or bai’ al-arbun or bai’ al-urboun) can be used to create a call option (standard urboun/ arbun- urboun call option/ arbun call option) and a put option (reverse arbun/ urboun– arbun put option/urboun put option). it gives the right to either parties or both to cancel the contract during a specific period of time, with the understanding that the one who fails to honor his respective obligation (e.g. proceeding with a contract of sale- aqd al-ba’i) will not claim back the down payment amount he originally made.