How Does Short Selling Relate to Options and Derivatives?

Short selling and derivatives like options are both strategies used to profit from a decline in an asset's price. Instead of borrowing and selling a stock, a trader can use derivatives to achieve a similar bearish position.

For example, buying a put option gives the holder the right to sell an asset at a predetermined price, profiting if the market price drops below it. This is often called synthetic short selling.

While traditional short selling has unlimited risk if the asset price rises, a put option's risk is limited to the premium paid.