Real Option In Practice

An option represents freedom of choice, after the revelation of information. An
option is the act of choosing, the power of choice, or the freedom of alternatives.
The word comes from the medieval French and is derived from the
Latin optio, optare, meaning to choose, to wish, to desire.


An option is a right, but not an obligation, for example, to follow through on a business
decision. In the financial markets, it is the freedom of choice after revelation
of additional information that increases or decreases the value of the asset on
which the option owner holds the option. A financial call option gives the
owner the right, but not the obligation, to purchase the underlying stock in
the future for a price fixed today. A put option gives the owner the right, but
not the obligation, to sell the stock in the future for a price fixed today.


A “real” option is an option “relating to things,” from the Late Latin
word realis. Real refers to fixed, permanent, or immovable things, as opposed
to illusory things. Strategic investment and budget decisions within
any given firm are decisions to acquire, exercise, abandon or let expire real
options. Managerial decisions create call and put options on real assets that
give management the right, but not the obligation, to utilize those assets to
achieve strategic goals and ultimately maximize the value of the firm.

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