Whenever we talk about real options and especially when mentioning “Never commit early unless you know why. ” we get asked “what is the optimal time to execute the option?”. The answer: there is none.

Determining the perfect moment to execute an option is nothing more than pure luck. The only way to determine you have reached the top of a mountain is when you have reached it and you can see there is no highter point from where you are.

Executing options is time related and as such the only moment is now. To know the timing is optimal you must compare it with what has happened before and what will happen in the future. That act of foresight requires mystical powers which must of us mortals don’t have. Otherwise you are just guessing.

When shopping for a new piece of equipment (TV set or some sort of big manufacturing machine) how do you know you are going to get the best deal? Truth be told you never will. There is always going to be a better piece of machinery with more functionality and a lower price tag. Deciding what the best time to act is depends on your constraints and the value the machinery provides.

Now that we know labelling something as optimal is only possible in retrospect should you just not bother about the timing of the options? Of course not, timing is still essential. What can we do about the timing of the execution to do it well?

What can you do?

• Set your own constraints.
• Review your options.
• Collect information (and find more options).
• When an option is about to expire review your constraints to see if they are still valid.
• Choose the best option based on your current information at hand.

Setting constraints

Setting constraints means you determine what you want to achieve when you have executed the option. And most importantly under what conditions. Although you are not looking for the absolute best deal you can, still doesn’t mean you have to settle for low quality or low effect. You can still strive for excellence, just not for the optimal result.

If you change your constraints (required features, maximum cost, etc.) start over. By using this approach you can feel good that you have made a good effort to make the best decision at that point in time with the information you have available.

Excellent is good enough. Reaching for the best is frustrating, impossible to control and simply just pure luck.

Photo taken by kenyai