Index options are financial derivatives that give investors the right, but not the obligation, to buy or sell a specific stock market index at a predetermined price before a certain expiration date. Unlike traditional options, which are based on individual stocks, index options are based on a collection of stocks, such as the S&P 500 or NASDAQ-100. These options can be used for various purposes, including hedging against market movements or speculating on future index performance. They are typically cash-settled, meaning that when exercised, the investor receives or pays the difference between the index level and the strike price, rather than trading actual shares.