Shark Fin Options, a type of knock-out option, is an option with a built-in mechanism to expire if a specified price level (i.e., knock-out price) is exceeded before the option expires. It will have the same functionality as a plain vanilla call or put option if the market price of the underlying asset does not exceed the knock-out price.
Assume an investor purchased a Shark Fin call option on a stock with the initial price of 100 and a knock-out price of 120. Over the life of the option, if the stock trades above 120, the option would automatically expire. If the market price of the stock trades between 100 and 120, the investor would derive profits upon option expiry. The profits earned by the investor are shown in the diagram below.
As seen from the above diagram, the shape of the return curve resembles the fin of a shark, which explains why such an option is termed a “Shark Fin Option’. A Shark Fin Call Option limits the profit potential for the option buyer.
Other than a Shark Fin Call Option, there are also other types of Shark Fin Options, such as Shark Fin Put Option, where the option expires once the market price of the underlying asset falls below a specified knock-out price.