Learn the Option Pricing Method of Valuation from Aswath Damodaran of the Stern School of Business at New York University
If you are at the beginning of your journey to learn business valuation, my recommendation is to start with an expert and learn from them. Aswatch Damodaran teaches business valuation courses at the Stern School of Business at New York University.
This article is an aggregation of Professor Damodaran's videos about the third type of business valuation, the Option method.
The Option method is not a completely separate valuation method, but rather is an augmentation of the Discounted Cash Flow method.
What I love about the professor's videos is that he uses concrete examples in the course of grounding you in the option method of valuation. This episode is session twenty-one of his series of videos.
To further the option pricing method of business valuation, in session twenty-two of this video series, Professor Damodaran discusses the "option to delay" potential adjustment of future expectations. Keep in mind, this is fairly advanced and I highly recommend spending most of your time on discounted cash flow and relative valuation methods.
In session twenty-three if this excellent video series, the professor discusses two more options: the option to expand, and the option to abandon. Bringing in these options will help you to refine a discounted cash flow by including both.
The final video in the option pricing method by professor Aswatch Damodaran discusses the implications of distressed equity as an option.
The idea of incorporating these options into the valuation you are doing is an important one, but is also a complex one. If you are at that point in your understanding of valuation, you have come a long way.