DEFINITION of 'Option Agreement'

1. A signed agreement between an investor who is seeking to open an options account and his or her brokerage firm. This agreement is used to verify the investor's level of experience and to ensure that the investor clearly understands the various risks involved when trading options.

2. An agreement between two parties that provides one of the parties with the right but not the obligation to buy, sell or obtain a specific asset at an agreed upon price at some time in the future.

BREAKING DOWN 'Option Agreement'

1. This agreement illustrates that the investor understands the rules set forth by the options clearing corporation and that he or she will not be an undue risk to the brokerage firm. An investor is generally required to understand the option disclosure document, which highlights various options terminology, strategies, tax implications and unique risks, before the broker will allow the investor to trade options.

2. A common type of option agreement is found in the real estate market, where one party buys the right to have the first chance of purchasing a piece of property at a specific price at some point in the future. Another common type of option agreement is a written outline that provides the details of an employee's ability to obtain stock options.

RELATED TERMS
  1. Option Disclosure Document

    A publication issued by the Options Clearing Corporation (OCC) ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  3. Stock Option

    A privilege, sold by one party to another, that gives the buyer ...
  4. Call On A Put

    One of the four types of compound options, this is a call option ...
  5. Trading Partner Agreement

    An agreement drawn up by two parties that have agreed to trade ...
  6. Expansion Option

    An embedded option that allows the firm which purchased the real ...
Related Articles
  1. Trading

    Options Pricing

    Options are valued in a variety of different ways. Learn about how options are priced with this tutorial.
  2. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  3. Trading

    Pick the Right Brokerage Account for Options Trading

    Follow these steps to pick the right options brokerage account depending on your trading needs and style of trading.
  4. Trading

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  5. Personal Finance

    Top 5 Books to Become an Option Trader

    For individuals aspiring to become options traders, here are five of the best books that offer help in understanding and profiting from the options markets.
  6. Trading

    Exploring European Options

    The ability to exercise only on the expiration date is what sets these options apart.
RELATED FAQS
  1. Where can I purchase options?

    In the United States, all options contracts go through one of several options exchanges. An investor must have an account ... Read Answer >>
  2. Do you have to be an expert investor to trade put options?

    Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined ... Read Answer >>
  3. Is it possible to trade forex options?

    Yes. Options are available for trading in almost every type of investment that trades in a market. Most investors are familiar ... Read Answer >>
  4. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
Hot Definitions
  1. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  2. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  3. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  4. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  5. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  6. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
Trading Center