Reset stats option....

How does it work? Does it reset your lvl as well?

No, it "rerolls" your character, then gives you the option of picking either your old stats or the new ones. Every time you level up, there's a random element to how many attribute points you gain, and then they're randomly assigned to various stats. Not only can this get you more attribute points, but it can reassigned them to a better distribution. Without having delved too much into game math, I have to imagine that the four base stats (str, dex, vit, int) are worth far more early game, while the secondary stats that affect critical hit, dodge, and item drop rate have a larger impact once you have large stat bonuses on your weapons.