A Real Option is the right, but not the obligation, to undertake some business decision, typically the option to make a capital investment. For example, the opportunity to invest in the expansion of a firm's factory is a real option. In contrast to financial options a real option is not tradeable—e.g. the factory owner cannot sell the right to extend his factory to another party, only he can make this decision. The terminology "real option" is relatively new, whereas business operators have been making capital investment decisions for centuries. However the description of such opportunities as real options has occurred at the same time as thinking about such decisions in new, more analytically-based, ways. As such the terminology "real option" is closely tied to these new methods. The term "real option" was coined by Professor Stewart Myers at the MIT Sloan School of Management . - Wikipedia
Identifying Real Options By Campbell R. Harvey
The topic of real options applies the option valuation techniques to capital budgeting exercises in which a project is coupled with a put or call option. For example, the firm may have the option to abandon a project during its life. This amounts to a put option on the remaining cash flows associated with the project. Ignoring the value of these real options (as in standard discounted cash flow techniques) can lead to incorrect investment evaluation decisions.
Applications of options pricing theory to equity valuation
An overview by Prof. Aswath Damodaran (Stern School of Business)
Reaping Real Rewards
CFO Europe Magazine online article on real options (July-August 1999)
Real Options: Dealing with Uncertainty
Online paper by Prof. Neufville from MIT.
The Value, Costs and Organizational Consequences of Modularity
Outstanding online paper by Profs. Carliss Baldwin and Kim Clark from Harvard.
New words for old ideas
Online article on real options from a mine industry perspective.
New Developments in Strategic Management
Online article with special reference on real options.
Analysing Engineering Projects Using Real Options - Intelligent Investments in the Face of Uncertainty
Real applications at Boeing Company, reported in the Decisioneering Website.
An Alternative Perspective on Internet Valuations
An online article at Fuqua/Duke University by Richard Solano.
Short Real Options Article
By Prof. Fred Thompson, from Willamette University.
Using real options in strategic decision making
By Chris Walters and Tim Giles of London Economics, Spring 2000
Options for change (option-pricing theory)
By Stephen Black, A letter to the Editor of The Economist (UK) , 04 September 1999
Consider your options
Online article from Forbes Global, by Chana R. Schoenberger.
Exploring the Options
Online article by Shy & Nembhard from the University of Wisconsin-Madison
Thinking in Real (Options) Time
By Joanne Sammer in the Business Finance Magazine (March 2002)
How companies are maximizing the power of real options thinking without getting bogged down in complexity.
Las Decisiones de Inversión como Opciones Reales (The Investment Decisions as Real Options).
Online article by Prof. Juan Mascareñas from Universidad Complutense de Madrid (in Spanish).
Real Options: Finding Comfort in a "Learn and Adapt" World
This article, published in Valuation Strategies (January/February, 2004), concludes that learn and adapt behaviour usually increases value and reduces risk, above and beyond that which emerges from traditional Cash Flow analysis. It is worth emphasizing that these gains, while they would exist independently of the approach used to value an initial investment decision, would remain hidden to the decision maker if that approach were not one that identified, measured and incorporated into the valuation all available Real Options.
Articles from Motley Fool
Real Options in Petroleum
The first website on real options (1995) created by Marco A.G. Dias at PUC-Rio. A huge real options resource with spreadsheets, presentations , thematic sections, software, and much more!
real-options.org - Real Options in Theory and Practice .
A very nice new portal by Prof. Philipp N. Baecker, from European Business School - Finance Group (Germany). With several real options resources, papers to download, links, and much more!
Alexander Triantis' Real Options Portal
With several real options facilities, such as the Real Options Database with over 300 searchable published references about real options, teching resources, links and other materials.
Prof. Neufville's Real Options resources
From MIT. USeful real options spreadsheets, class notes and course material. Download also his real options papers award-winning real options dissertation.
Source: Real Options in Petroleum