Index options are puts and calls on a stock index rather than on an individual stock. They give investors the opportunity to hedge their portfolios or speculate on gains or losses in a segment of the market.
For example, if you own a group of technology stocks but think technology stocks are going to fall, you might buy a put option on a technology index rather than selling short a number of different technology stocks.
If the value of the index does fall, you could exercise the option and collect cash to partially offset a drop in the value of your portfolio.
However, to use this strategy successfully, the index you choose must perform the way the portion of the portfolio you're trying to hedge performs.
And since changes in an index are difficult to predict, index options tend to be volatile. The more time there is until an index option expires, the more volatile the option tends to be.