Expansion Option

DEFINITION of 'Expansion Option'

An embedded option that allows the firm which purchased the real option to expand its operations in the future at little or no cost. An expansion option, unlike typical options which obtain their value from an underlying security, receives its worth from the flexibility it provides to a company. Once the initial stage of a capital project has been implemented, an expansion option holder can decide whether to move forward with the project.


In terms of real estate, expansion options provide tenants with the choice to add more space to their living premises.

BREAKING DOWN 'Expansion Option'

For example, if a company is unsure as to whether or not its newly introduced product will be successful in the market, it can purchase an expansion option. The expansion option will allow the firm to assess the economic environment in the future and determine whether it is profitable to continue developing the particular product. If the firm initially expected to produce 1,000 units five years, exercising the expansion option would let them purchase additional equipment to increase capacity for a price which is below market value. If economic conditions are good and expansion is desirable, the option will be exercised. Otherwise, the expansion option expires.

RELATED TERMS
  1. European Option

    An option that can only be exercised at the end of its life, ...
  2. Exit Option

    An embedded option within a project that allows the firm abort ...
  3. Call On A Call

    A type of compound option in which the investor has the right ...
  4. Mid-Atlantic Option

    An option that can be exercised at different times during the ...
  5. Option Class

    The set of all the call options or all the put options for a ...
  6. Russian Option

    An option that gives the holder the right, but not the obligation, ...
Related Articles
  1. Investing

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
  2. Trading

    Options Pricing: A Review Of Basic Terms

    The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options - An option that can be at any point during the life of the contract. ...
  3. Trading

    Introduction - Day Trading and Options

    Options have not been a tradition part of day-trading strategy, but this is quickly changing.
  4. Trading

    Getting Started In Forex Options

    Stocks are not the only securities underlying options. Learn how to use FOREX options for profit and hedging.
  5. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  6. Investing

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  7. Trading

    Options Traders

    An options trader is anyone who buys and sells options in the capital market. As options trading is most commonly conducted through online option trading brokers, it is also commonly known as ...
  8. Markets

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  9. Managing Wealth

    20 Investments: Options (Stocks)

    What Is It? Options are a privilege sold by one party to another that offers the buyer the right to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time ...
  10. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
RELATED FAQS
  1. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  2. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  3. What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options ... Read Answer >>
  4. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  5. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
  6. Is it possible to trade forex options?

    Yes. Options are available for trading in almost every type of investment that trades in a market. Most investors are familiar ... Read Answer >>
Hot Definitions
  1. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  2. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  3. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  4. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  5. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
  6. Security

    A financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship ...
Trading Center