Real Option
An alternative or choice that becomes available with a business investment opportunity.
Investopedia Commentary
Note that this kind of option is not a derivative instrument, but an actual option (in the sense of "choice") that a business may gain by undertaking certain endeavors. For example, by investing in a particular project, a company may have the real option of expanding, downsizing, or abandoning other projects in the future. Other examples of real options may be opportunities for R&D, M&A, and licensing.
They are referred to as "real" because they usually pertain to tangible assets, such as capital equipment, rather than financial instruments. Taking into account real options can greatly effect the valuation of potential investments. Oftentimes, however, valuation methods, such as NPV, do not include the benefits that real options provide.
Related Links
It's Time To Get Real About "Real Options"
Taking Stock Of Discounted Cash Flow
See also: American Option, Call, Derivative, Embedded Option, European Option, Intrinsic Value, Leverage, Options Contract, Strike Price, Writer