Real options valuation, also often termed real options analysis, (ROV or ROA) applies option valuation techniques to capital budgeting decisions. A real option itself, is the right—but not the obligation—to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project.

 

The flexibility available to management – i.e. the actual "real options" – generically, will relate to project size, project timing, and the operation of the project once established. In all cases, any (non-recoverable) upfront expenditure related to this flexibility is the option premium. Real options are also commonly applied to stock valuation - see Business valuation #Option pricing approaches - as well as to various other "Applications" referenced below.