Okay, are you ready for your world to be rocked?
Most sources say the correct form is OK, and sometimes O.K. (as at the New Yorker and the New York Times). That's because the term originated in 1839 as the abbreviation for "oll korrect," the facetious alternative for "all correct." (Those crazy 19th-century cats!)
So "okay" is not OK. Except when it is okay. Calling it "the most successful Americanism ever--perhaps the best-known word on the planet," Bryan Garner writes in Garner's Modern American Usage:
"okay" has an advantage in edited English: it more easily lends itself to cognate forms such as "okays," "okayer," "okaying," and "okayed." The term is a casualism in any event, but "okay" is slightly more dressed up than "OK."
Don't tell that to the Associated Press, though. Its style book prefers "OK, Ok'd, OK'ing, OKs. Do not use okay." And the New York Times manual advises: "O.K., not okay... Do not use O.K. as a verb except in a direct quotation (O.K.'s; O.K.'d; O.K.'ing)." To my eye, all those periods and apostrophes look not OK; I prefer no periods, as does Merriam-Webster's.
The long of it is that the short form "OK" is preferred. That okay with you?
(T-shirt pictured available here.)