<PAGE>

                                                                    Exhibit 10.7

 
                           REUNION INDUSTRIES, INC.

                        FORM OF STOCK OPTION AGREEMENT

        Reunion Industries, Inc., a Delaware corporation (the "Company"), hereby
grants to [name] (the "Optionee") a non-qualified stock option (the "Option") to
purchase a total of [number] of the Company's common stock, par value $.01 per 
share (the "Common Stock"), at the price determined as provided herein, and in 
all respects subject to the terms and conditions of The 1998 Stock Option Plan
of Reunion Industries, Inc. (the "Plan"), which Plan is incorporated herein in
its entirety by reference. Capitalized terms not otherwise defined in this
agreement (the "Stock Option Agreement") shall have the meaning given to such
terms in the Plan.

        1. Nature of Option. This Option is not intended to qualify as an 
Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").

        2. Exercise Price. The exercise price of this Option is [price] per 
share of Common Stock acquired on exercise (the "Exercise Price").

        3. Term of Option. This Option may not be exercised more than 10 years 
from the date of grant of this Option as set forth herein and may be exercised 
during such term only in accordance with the terms and conditions of the Plan 
and this Stock Option Agreement.

        4. Termination of Directorship. If the Optionee's directorship with the 
Company is terminated for reasons other than Termination for Cause, Disability 
or death of the Optionee, the vested portion of the option under the terms of
this Stock Option Agreement shall remain exercisable for a period of three
months after the date of such Termination of Directorship; provided, however,
that after the expiration of this 3 month period, this Stock Option Agreement,
and the Optionee's right to exercise any vested portion of this Stock Option,
shall terminate. If the Optionee's directorship with the Company is terminated
because of Disability or death of the Optionee, an option which has vested in
accordance with this Stock Option Agreement shall remain exercisable for a
period of one year after the date of such Termination of Directorship; provided,
however, that after the expiration of this 1-year period, this Stock Option
Agreement, and the Optionee's right to exercise any vested portion of this Stock
Option, shall terminate. If the Optionee's Directorship qualifies as a
Termination for Cause, this Stock Option Agreement, and the Optionee's right to
exercise any vested portion of this Stock Option, shall terminate at the
commencement of business on the date of such termination.

        5. Term of Employment. This Stock Option shall not grant to Optionee any
right to continue serving as a director of the Company.


<PAGE>
 
        6. Exercise of Options. This Stock Option shall be exercisable during 
its term, subject to the provisions of Sections 3 and 4 hereof and the terms of 
the Plan, as follows:

                (a) Vesting. This Stock Option shall vest on the date of grant 
as provided herein, at which time all shares subject to such option are vested 
and immediately exercisable under the terms and conditions of the Non-Qualified 
Option Agreement.

                (b) Right of Exercise. This Stock Option is exercisable at any 
time during the term of this Stock Option Agreement, in whole or in part, to 
acquire those shares which have vested in accordance with this Stock Option 
Agreement; provided, however, that this Option may only be exercisable to 
acquire whole shares of Common Stock.

                (c) Method of Exercise. Subject to Section 2 of the Plan, this 
Stock Option is exercisable upon delivery of a written notice to the attention
of the Secretary of the Company, signed by the Optionee, or such other person
than entitled to exercise the Option stating that the Option, or a portion
thereof, is exercised, and full payment of the Exercise Price of the Option
Shares.

                (d) Method of Payment. Payment of the Exercise Price for the 
Option Shares purchased under this Option and for payment of any applicable 
withholding or other applicable employment taxes with respect to this Option 
shall be delivered, to the attention of the Secretary of the Company, on the 
effective date of exercise either (i) in cash or (ii) subject to the approval of
the Board, any of the other payment methods allowed under Section 5.2(d) of the 
Plan.

        7. Restrictions on Exercise. This Option may not be exercised if the 
issuance of such Option Shares or the method of payment of the consideration 
for such Option Shares would constitute a violation of any applicable federal or
state securities or other laws or regulations, as promulgated by the Federal
Reserve Board, or any rules or regulations of any stock exchange on which the
Common Stock may be listed.

        This Option may only be exercised in accordance with the terms and 
conditions of the Plan and this Stock Option Agreement. If a conflict exists 
between any term or provision of this Stock Option Agreement and a term or 
provision of the Plan, the applicable terms and provisions of the Plan shall 
govern and prevail.

        8. Nontransferability of Option. During the lifetime of the Optionee, 
this Option may only be exercised by the Optionee. This Option is not assignable
or transferable otherwise than by will or by the laws of descent and 
distribution or pursuant to a QDRO. The Plan limits the vesting and exercise 
period of this Option up on disability or death of the Optionee. The terms of 
this Stock Option Agreement shall be binding on the Optionee's heirs and 
successors and on the administrators and executors of the Optionee's estate.

                                      -2-
<PAGE>
 
     9. Qualification as a Non-Qualified Stock Option. The Optionee understands 
that this Option is not intended to qualify as an "Incentive Stock Option" 
within the meaning of Section 422 of the Code.

     10. Independent Legal and Tax Advice. The Optionee has and will obtain 
independent legal and tax advice regarding the grant and exercise of this 
Non-Qualified Option and the disposition of any shares of common stock acquired 
thereby.

     11. Amendment and Termination. The Plan may be amended, modified or 
terminated at any time by the Board, provided, however, that no amendment or 
termination of the Plan or this Stock Option Agreement shall, without consent of
the Optionee, alter or impair any rights or obligations under any Option 
theretofore granted or awarded.

     12. Governing Law. This Stock Option Agreement shall be governed by and 
shall be construed and enforced in accordance with the laws of the State of 
Delaware as they apply to a Delaware.

     IN WITNESS WHEREOF, the Company has as of [date], caused this Stock Option 
Agreement to be executed on its behalf by its President or any Vice President 
and Optionee has hereunto set his hand as of the same date, which date is the 
date of grant of this Option.

                                        REUNION INDUSTRIES, INC.

                                        By:
                                           ----------------------------------


                                        OPTIONEE:


                                        -------------------------------------






                                      -3-