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. Stock Option

    A privilege, sold by one party to another, that gives the buyer ...
  2. Basket Option

    A type of financial derivative where the underlying asset is ...
  3. Russian Option

    An option that gives the holder the right, but not the obligation, ...
  4. Trading Partner Agreement

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

    An embedded option that allows the firm which purchased the real ...
  6. Exchange-Traded Option

    An option traded on a regulated exchange where the terms of each ...
Related Articles
  1. 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.
  2. Trading

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  3. Trading

    A Newbie's Guide To Reading An Options Chain

    Learning to understand the language of options chains will help you become a more informed trader.
  4. Trading

    Getting Started In Forex Options

    Stocks are not the only securities underlying options. Learn how to use FOREX options for profit and hedging.
  5. Trading

    The 4 Advantages of Options

    Flexible and cost efficient, options are more popular than ever. Find out why.
  6. Trading

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
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. What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options ... Read Answer >>
  3. When does one sell a put option, and when does one sell a call option?

    The incorporation of options into all types of investment strategies has quickly grown in popularity among individual investors. ... Read Answer >>
  4. 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 >>
  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. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  2. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  3. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  4. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  5. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  6. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
Trading Center