Definition

The definition of real options is a bit elusive. The following is a good approximation, although the boundary between real and financial options is not well defined.

Real options: a) options to undertake a course of action that alters the cash-flows from a real (i.e. physical) asset; b) the application of derivatives theory to the operation and valuation of real investment projects.

Definition (b) is from "Derivatives Markets" by Robert L. McDonald, page 527.