Uncertainty defines the television business. Who really knows whether a show will be a hit or a dud, or at what time or on which day it must be broadcast to reach the biggest audience and thus capture the largest advertising premium? TV executives have been struggling with these questions since the industry’s creation. Although TV programmers put their faith in pilots and market research, they also rely heavily on instinct. Much rides on their judgment, since programming accounts for 55 to 65 percent of a TV channel’s expenses. Is there a way to improve the odds of success or at least to minimize the damage caused by disappointing shows?

McKinsey has found that applying options theory to TV programming decisions can improve returns from programming investments. The holder of a financial option has the right, but not the obligation, to buy or sell a stock at a fixed price within a fixed period. In recent years, many companies have begun to apply options theory and the Black-Scholes pricing formula to nonfinancial, or "real," investment decisions. Options used in this way—known as real options—have found ready acceptance in the mining, petroleum, and pharmaceutical industries, where uncertainty is high and...