Expansion Option

An expansion option is a type of real option that gives a business the opportunity to invest additional capital to expand operations, projects, or product lines in the future. This strategic flexibility allows companies to capitalize on favorable market conditions or opportunities that may arise, without committing to large-scale investments upfront. Expansion options are valuable in uncertain or volatile environments, as they enable firms to make incremental investments based on evolving market information. Expansion options are commonly seen in industries such as energy, real estate, and technology, where the ability to scale operations quickly can provide a significant competitive advantage.

Example

A mining company may hold an expansion option on a land lease, allowing it to increase production if gold prices rise significantly, maximizing potential profits.