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

There is a lot of talk about the last responsible moment. So what is the last responsible moment? And perhaps more importantly: how do you calculate the last responsible moment?

The last responsible moment is after which execution of an option is too late. The option no longer exists or you’re not able to execute it any more.

So how do you work out the last responsible moment for a real option? There is a 3-step process:

1. Work out the deadline
2. Identify options
3. Determine execution time for each option

These steps together give you the last responsible moments. Moments is plural as each option involved in the decision has a last responsible moment. And to be able to determine the better option among the choices we need to know all their last responsible moments.

Identifying the real deadline for your decision is harder than it may seem. While in the process of identifying options and gathering information at a certain point patterns arise. You need to find these patterns to identify the real constraint. Often it is possible to come up with completely new options never thought of before when trying to solve the newly found constraint.

After identifying many options work out the last responsible moment for each of these options. Perhaps you need some preparation in advance to be able to execute, also you need to factor in lead time and add some padding for unidentified disturbances.

Most importantly: don’t decide in advance, it will lead to premature optimisation. You need to know when options expire (when their last responsible moment has passed) to be able to make a deliberate decision not to execute an option.

Optimal Last Responsible Moment

We often get asked: is it possible to determine the optimal last responsible moment? No! Yes! Well maybe. The problem is determining the optimal moment is that it is only possible in retrospect. Only when we know what happens after that moment we can be certain it is the optimal moment. This provides us with no value at the time of decision making. Therefor trying to find the optimal moment is a waste of effort.

Look for the last responsible moments. If you can only identify one or two you haven’t looked hard enough.