This option is available with selected area features that contain islands. Select the area features with the digitizer tool, then right-click to the context menu to Advanced Feature Creation Options sub menu.
This will modify area features to remove islands, either by including the internal vertices in the area features, or by subdividing the polygon.
Select Yes to include all internal vertices from the island features in the vertex list. This can create invalid polygons.
Select No to chop or subdivide the area features with islands to preserve the holes. This will split the parent area along the major and/or minor axis of the island features.