"Short selling" is the process of selling something you don't have, promising to deliver later, on the basis that you expect the price to go down. Then, later, when someone requires you to deliver the items you sold them, you buy them at the current market price and deliver them.
If the price has indeed gone down then you win. Problem is, the price may have gone up, and now you have to buy at a higher price, so you lose. The worst part of this is that the loses are unbounded, since the price rise could be arbitrarily large.
In practice it's not a problem, some you win, some you lose, and you are effectively betting on price market movements.
You can now deal with options. So when you promise to sell someone something in the future at price X, they have the option in the future of taking you up on that. If the price of X has gone down then obviously they will go and buy it directly, but if the price has gone up then they come to you and demand that you supply at the agreed price. In return for this option, they pay you when the deal is strike. Thus you are selling them the option of buying at a price.
Similarly you can sell them the option to sell you something at a price. These options are derivatives from the original concepts of buying and selling at given prices.
There's more, but I'll stop, not least because that's pretty much all I know.
If the price has indeed gone down then you win. Problem is, the price may have gone up, and now you have to buy at a higher price, so you lose. The worst part of this is that the loses are unbounded, since the price rise could be arbitrarily large.
In practice it's not a problem, some you win, some you lose, and you are effectively betting on price market movements.
You can now deal with options. So when you promise to sell someone something in the future at price X, they have the option in the future of taking you up on that. If the price of X has gone down then obviously they will go and buy it directly, but if the price has gone up then they come to you and demand that you supply at the agreed price. In return for this option, they pay you when the deal is strike. Thus you are selling them the option of buying at a price.
Similarly you can sell them the option to sell you something at a price. These options are derivatives from the original concepts of buying and selling at given prices.
There's more, but I'll stop, not least because that's pretty much all I know.