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. For example, real options valuation could examine the opportunity to invest in the expansion of a firm's factory and the alternative option to sell the factory. Real options are most valuable when uncertainty is high; management has significant flexibility to change the course of the project in a favorable direction and is willing to exercise the options.

Real options are generally distinguished from conventional financial options in that they are not typically traded as securities, and do not usually involve decisions on an underlying asset that is traded as a financial security. A further distinction is that option holders here, i.e. management, can directly influence the value of the option's underlying project; whereas this is not a consideration regarding the underlying security of a financial option. Moreover, management cannot measure uncertainty in terms of volatility, and must instead rely on their perceptions of uncertainty. Unlike financial options, management must also create or discover real options, and such creation and discovery process comprises an entrepreneurial or business task.

Real options analysis, as a discipline, extends from its application in corporate finance, to decision making under uncertainty in general, adapting the techniques developed for financial options to "real-life" decisions. For example, R&D managers can use real options valuation to help them deal with various uncertainties in making decisions about the allocation of resources among R&D projects. Non-business examples might be evaluating the cost of cryptocurrency mining machines, or the decision to join the work force, or rather, to forgo several years of income to attend graduate school. It, thus, forces decision makers to be explicit about the assumptions underlying their projections, and for this reason ROV is increasingly employed as a tool in business strategy formulation. This extension of real options to real-world projects often requires customized decision support systems, because otherwise the complex compound real options will become too intractable to handle.

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.

Where the project's scope is uncertain, flexibility as to the size of the relevant facilities is valuable, and constitutes optionality.

Where there is uncertainty as to when, and how, business or other conditions will eventuate, flexibility as to the timing of the relevant project(s) is valuable, and constitutes optionality.

Management may have flexibility relating to the product produced and/or the process used in manufacture. As in the preceding cases, this flexibility increases the value of the project, corresponding in turn, to the "premium" paid for the real option.

Given the above, it is clear that there is an analogy between real options and financial options, and we would therefore expect options-based modelling and analysis to be applied here. At the same time, it is nevertheless important to understand why the more standard valuation techniques may not be applicable for ROV.