Herin are a number of ways your magic item might come into being, apart from something you order from your local wizard.
A standard roleplaying environment: the tavern. This is another easy one to create in your own home, providing you have a large enough group of roleplaying friends. Let us assume your PC group is no larger than five, and that the rest of your friends can be NPCs. Let us also aim for an exceptionally seedy and unscrupulous city tavern.
In a good LARP it is desirable to separate the players out individually at some stage, because they are more suggestible and afraid when they are alone. Some form of individual challenge is probably the best way of doing this. One possible setting for this is a cave system, and it is probably one of the easiest to recreate realistically, and one of the most perfect for playing on fears of claustrophobia and darkness.
When the characters approach a clearing in the forest, they will see 4 ogres who are guarding, and preventing from escape, 4 human males, and 3 human females. The ogres will see the party and leap to attack. The females will scream "OUR SAVIORS!!" and run screaming straight across the currently forming battlefield, in between ogres and party members, to hide behind the rearmost party members. They will be safe there. The males will try to skirt the battle to the north side to join the women.
To the south, giants will be hiding in the thick underbrush until the party has engaged the ogres and then attack the most opportune target EXCEPT the ones that the females are next to.
It should be noted that the female commoners are not female commoners at all, nor are the male commoners actually male commoners. The female commoners are the hags, who have polymorphed themselves as the commoners in their stewpot to escape detection. The males skirting the battle are actually MORE ogres, the hags were in the process of polymorphing ALL the ogres into regular humans for ambush purposes. The REAL commoners are already dead, having found their way into the coven's cauldron for dinner.
The hags (the women) will position themselves near to any spellcasters in the rear first, and then near anyone else in the back of the fight. The ogres (the men) will wait until the hags shift form, and then attack first the rear folks, then shift into the melee.
It is possible that the characters, as they approach the ogres, will notice the giants in the bush, and be able to warn the others of the ambush.
GAME NOTES: If you sell the screaming women correctly, they will not even be suspected until it is too late. Therein lay the problem. This encounter is ESPECIALLY deadly to the rear eschelon of the party. It is entirely possible that the hags will finish off half the party before they even realize they have been duped. Caution is required if the game master wishes to avoid a TPK(total party kill).