Thales, a famous Sophist philosopher circa 600 B.C., gazed into the star-studded sky one evening and predicted an outstanding olive harvest the next season. For a small up-front fee, he bought the right from the owners of the olive presses to rent them for the usual rate during the harvest season. If the harvest turned out to be meager, there would be less need for the presses and Thales would not rent them, losing the up-front fee. But if the harvest was bountiful, he would rent the presses at the regular agreed-upon price and turn around and rent them out to the farmers at a significant margin. Sure enough, it was an outstanding harvest, and Thales rented the in-demand presses and made a fortune. He was apparently more interested in proving the wisdom of Sophists than making money, as Aristotle tells this story in Politics.

This is one of the frequently cited earliest examples of a real options contract, wherein Thales bought an option a right, but not an obligation to rent the presses, the underlying risky asset. This is called a real option, not a financial option, because the underlying asset is a real asset, not a financial asset. Real options evolved from financial options, and therefore the terminology is common to both. Using a simple financial example, let us first introduce the options terminology and draw parallels between commonly known financial options and poorly understood real options.