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The Skinny on Options: Abstract Applications

Real Options

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

As traders, we might not initially think that the world of corporate finance is useful to us, but surprisingly, it certainly is. When it comes to project evaluation, most analysts will begin with a standard Net Present Value Analysis (something we’ve already seen can be applied to trading). But the problems with using NPV stem from the fact that it is static and rigid in its application.

Thus, what most project evaluators will ultimately end up using is a Real Options analysis to help make their decisions. This method of analysis allows for adjustments to be made along the way, and it is directly applicable to us in the trading world.

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