Index Option

A call or put option on a financial index.

Investopedia Says:
Investors trading index options are essentially betting on the overall movement of the stock market as represented by a basket of stocks. Options on the S&P 500 are some of the most actively traded options in the world.

Related Links:
An introduction to the world of options, covering everything from primary concepts to how options work and why you might use them. Options Basics Tutorial
Learn how to multiply returns and diversify risk by buying options instead of stock. Using Options Instead Of Equity
Get to know the most important market indices and the pros and cons of investing in them. Index Investing

Calls and puts on indexes of stocks. There are "broad" indexes applying to a wide range of firms and industries. There are also "narrow-based" indexes relating to one industry or economic sector. An advantage of investing in an index option is that an interest in many companies is possible with a limited investment. It should be noted, however, that options have a limited life, are used to speculate or to hedge, and are settled in cash. In other words, if an index option is exercised (not normally done), the investor would not receive (or pay) the underlying stock, but would, rather, settle in cash.