Index Option

Option contracts, in general, give the holder the right (but not the obligation) to buy or sell a certain underlying asset.

You might have the option to buy 100 shares of NFLX at $400, expiring in June. Or you might have the option to sell 100 barrels of oil at $70, expiring in July.

An index option applies this concept to an index, rather than an individual stock or other asset. So...you might acquire an option to buy the value of the S&P 500.

These contracts allow investors to bet on general market movements (letting the S&P 500 stand in for the overall stock market, for instance) or target particular segments of the market, as tracked by other indexes. They also provide a way to hedge risk elsewhere in an investor's portfolio.