How does shorting a put option work?

Question

Shorting a put option seems counter-intuitive to me. If you short something you hope the value falls so that you can replace it at a lower cost. A put option gives you the option to sell at a certain price if it falls. How then would shorting a put option work?

Answer 1

When you short a put option (write a put option) you are giving someone else the right to sell a specified number of shares of a particular underlying (stock/future/index) for a specified price for a specified time period. You are accepting the obligation to buy the underlying at the strike price if the holder of the option decides to exercise that right. In return for accepting that obligation you are paid a cash premium.

For a slightly longer explanation you can go to

http://www.cboe.com/LearnCenter/Tutorials.aspx

to read the "options basics" tutorial.

Answer 2

Short A Put Option

Answer 3

You're shorting a put option so you hope the value of the put option falls. This will happen if the underlying asset increases in value or through the passage of time as the option nears expiration.