Gap options, also known as gap risk options or gap risk management options, are financial derivatives that provide protection against sudden price gaps or discontinuities in the underlying asset. These options are designed to hedge against potential losses resulting from unexpected market movements during the gap period.

In the financial markets, gaps refer to situations where the price of an asset jumps from one level to another without any trading occurring in between. These gaps can be caused by various factors, such as significant news events, economic data releases, or changes in market sentiment. Gap options aim to mitigate the risk associated with such price gaps.

Gap options can be structured in different ways depending on the specific needs of the investor or trader. They can be designed as put options or call options, depending on whether the investor wants to protect against a downward or upward price gap. The strike price, expiration date, and premium of the option are determined based on the investor\'s risk tolerance and market expectations.

When a price gap occurs during the gap period, the gap option provides a payout to the holder to compensate for any losses incurred. The size of the payout depends on the specific terms of the option contract. If no price gap occurs, the option expires worthless, and the investor loses the premium paid for the option.

Gap options are commonly used by investors and traders who are exposed to significant market risk and want to protect their portfolios from sudden adverse price movements. They are particularly popular in volatile markets or during periods of high uncertainty when price gaps are more likely to occur.

It is important to note that gap options are complex financial instruments and require a thorough understanding of options trading and risk management. They are typically used by experienced investors and professionals in the financial industry.