ELI5: Explain Like I'm 5

Real option

A real option is a fancy way of saying that something might happen in the future and you have to make a choice about it now. Imagine you really like ice cream but you can't decide if you want chocolate or vanilla. You might wait until the ice cream truck comes by and then decide based on what's available. That's kind of like a real option. You're waiting to see what happens before making a decision.

In the business world, this can happen when a company is trying to decide if they want to invest in something. For example, they might be considering building a new factory. They have to make a big decision about whether or not to spend a lot of money on this project. But they don't know for sure if it will be successful. Maybe they'll get new competition or there will be a change in regulations that make it harder to make money from this factory.

So, they use a real option. Instead of making a decision right away, they might wait and see what happens in the future. They might do some research or test some things out to see if it's a good idea. And then, when they have more information, they can make a better decision.

Just like with the ice cream example, they're waiting to see what happens before making a choice. And that's what a real option means in the business world.