When you short an asset (or sell it short), you sell an asset that you do not own, but that you borrowed from someone else.

Assume you have a share in company X, and I think the market price for that share will drop, and you think it wont;  I could ask you to lend it to me for some time; we agree on minimum and maximum terms, I pay you a fee it, and then I can sell the share at the current high price, and some time later, I will buy it back (at a lower price hopefully) and return the share to you. Its simply a bet the price will fall. As the short seller, my potential profit is the difference between sell and buy price (minus your fees) and it can never be bigger than the asset value, ie when the price would drop to zero and I could buy it back for free.  My risk however, when unhedged is in theory unlimited, since the price of the asset could go arbitrarily high.

A put option works similarly, but its a contract between buyer and seller that doesnt necessarily involve a transfer of the asset. There is also a difference in risk and potential profits; the risk to the buyer of the put option (who bets on a price drop) is limited to the premium paid to the seller. If the buyer loses his bet, and the price does not drop below the strike price, his option becomes worthless, but thats it. His potential profit is limited to the difference between current price and the agreed strike price.

eck, I see deprived posted while I typed..