A real option, gives you the right, but not the obligation to begin a certain action, such as deferring, abandoning, expanding, staging, or contracting a capital investment project at a fixed price for a predetermined time period.
As compared with other options, real options give the opportunities to expend and conclude a project in certain conditions. They are called “real” just because they mostly belong to material assets, such as capital equipment and also financial investment.
A real option is not a derivative instrument. It is an actual option, that by making certain efforts. An example of a real option may be the investment in special projects, a company may have the real option of expanding, abandoning or staging other projects in the future.
Real options have two unique characteristics. One is that some or all of the underlying assets are not traded, and the other characteristic is that underlying assets might, or might not have correlation with other traded assets.
Real option analysis (ROA) are usually used for making critical decisions. It gives the plan of action depending on future events.