Expert: Paul Henneman - 1/31/2008

Question
whats the difference between a put option and shorting

Answer
Jahmine,
   Thank you for your question!
A put option is something that you can purchase that gives you the right to sell a specific number of shares by a specific date for a specific price.  You pay a fee for this right, and if things work out the put is profitable. If not, the contract can simply expire, and you lose the fee you paid, but not the full cost of shares or difference in price.

With a short position, I will offer the definition I found in Barron's "Dictionary of Finance and Investment Terms", page 556:
"A commodity sold short represents a promise to deliver the commodity at a set price on a future date." However, generally the date is not set, unlike a put option. Also, think of short positions as borrowing the stock, to be repaid back later, hopefully at a lower stock price so that you as the investor makes money.

However, a put option is basically a contract where you purchase the right to sell a specific number of shares for a specific price by a specific date.

It can get a bit more complicated, as the put option itself has value and the contract can be bought or sold before the expiration date. Barron's Dictionary I mentioned above has more details, or you can visit  www.investorwords.com and look up each for more details. Or, if you prefer, please do not hesitate to follow up with me if the above answer does not help, or you have any additional specific questions,

Best Regards,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com