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. Exotic Option

    An option that differs from common American or European options ...
  4. Stock Option

    A privilege, sold by one party to another, that gives the buyer ...
  5. Trading Partner Agreement

    An agreement drawn up by two parties that have agreed to trade ...
  6. Clearing Member Trade Agreement ...

    An agreement by which an investor may enter derivative trades ...
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

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  4. 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.
RELATED FAQS
  1. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
  2. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  3. 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 >>
  4. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  5. 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 >>
Hot Definitions
  1. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  2. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  3. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  4. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  5. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  6. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
Trading Center