Yes that is true in some sense, but with options its far more likely that your money will disappear (the options will expire worthless) than with shorts (the price would have to double for that to happen)

OK. Let's try the math and see what happens. (I don't ever speculate on stocks and don't even have a margin account, so let's see how this goes wrong for me.)

We'll say I think ZNGA will be $1.25 on 11/17, which is rather ambitious but let's go with it since their games are so spammy.

So, I sell 1000 shares of ZNGA for $2420. Right now, I can close my position by buying the shares back for $2450, so I'm already down about $50 because of commission and ask/bid spread. (My brokerage charges $8.95 for trades, but you can get them cheaper than that, so you might only be down $30 if you can trade for free.) Let's imagine the stock stays flat until 11/17: the scenario remains the same except I've paid interest on the stock I borrowed (probably about $30). So the result is a loss of $80. The stock has been flat since their last earning's announcement, so this seems the most likely scenario.

Except, they have an earnings announcement on 10/26, and at their last earnings announcement, their stock lost almost 50% of its value. So if that happens again, their stock could drop to $1.25. In that case, you'd be short only $1250, for a profit of about $1135 after interest and commissions. That's fine, but you have to admit that this is highly speculative.

Let's imagine that they issue a healthy earnings report (they fired the office equipment thieves), and their shares go up to $3.00. (Remember, they were at almost $5 before their last earnings report a quarter ago.) Now you are down about $570.

So realistically speaking, you stand to make $1000 for $500 of risk. Now let's consider what the options route would buy us. There are many routes so let's explore buying in-the-money puts, out-of-the-money puts, and at-the-money puts. (We'll avoid selling uncovered calls because I am lazy and my brokerage wouldn't let me anyway.)

A $2.50 strike 11/17 expiration put is $30 per contract ($300 for 10 contracts or 1000 shares) and has $50 of intrinsic value (for the 1000 shares). So if ZNGA stays flat until expiration, you can sell the put for those $50 (minus $20 in commission). If the stock goes up, you lose all $310 (but only have to pay the commission once, what a deal!) If the stock goes down to $1.25, however, you have $1.25 per share of intrinsic value at expiration (less before expiration because delta != 1), making this best-case upside worth $1230 after commissions. That's better than the upside for the short sell, since you're paying the option seller interest at a lower rate than you'd be paying your brokerage interest. Absolute worst case downside: -$310, stock stays flat: -$270, best case upside: ~$2200, expected case: $1230. That ends up better than the short sell if you're sure about the timeframe. If you're not sure you could sell somewhere in the middle but you'd not get $1 for every $1 ZNGA lost because delta is probably not 1 yet.

If we buy an in-the-money $3.00 option, it costs $670, but both the delta and intrinsic value are higher. If the stock stays flat, we can sell for $500 and only lose $190 (commissions included). If the stock goes down to our target price of $1.25 at expiration, we can sell the option for $1750 and make $1060. Worst case: -$670, flat case: -$190, best case: ~$300, expected case: $1060. We limited our profits, in this case, for less risk if the stock stays flat. (Our total risk is higher, though.)

Finally, what if we buy a dirt-cheap out-of-the money option? The $1.50 strike put is $70 for 10 contracts and commission is $10. If the stock stays flat or goes up, the option expires worthless and we are out $80. If the stock hits $1.25 at expiration, then we get $250 of intrinsic value at the end for $160 in profit. Those options are cheap for a reason. (But hey, if you buy 100 contracts for $700, you could make $1780, which is not too bad. But that's more risk than I think we have on the short stock strategy.)

Anyway, what I've learned from all this is that I think ZNGA is down about as far as it will go and it's just going to die a slow death from here. YMMV but I'm not buying any options or selling any of its stock short :)

Puts are excellent when you have a very concrete timeframe and price target. However, when you lack both, the short is a better trade.

Aside: In your example, if you buy the puts for 30 cents per share, you are paying 24 cents in theta. Now, if you plan on selling before then, you don't pay the full penalty. However, If you plan on holding till expiration, your breakeven is 2.20 (just to get back the premium you paid). Now, if the equity fell to 2.20 and you shorted directly, you'd do far better than breakeven.

The people buying 2.50 weekly options that expired last Saturday would have lost all of their money. They may have been correct in their general directional prediction, but the contracts expired worthless.

I did not have a timeframe and I only had a rough price target. All I knew was that it was going to have to fall hard (2.40 price target) at one point before earnings. I could have bought long-dated puts, but at that time they were far more expensive and even the $3.00 puts were more than .60 cents per share (which would mean I'd just barely show a profit).

As another stark example of the quirks of pricing, check out the Oct20 AAPL puts. Many of the deep out of the money puts lost MTM value because its become less likely that the price will fall far enough. So especially if you come into the trade early, you end up paying quite a bit in theta.

Try the math with GOOG instead of ZNGA, and you'll find that shorting the stock outright is a lot more cost efficient than buying puts.

The only way you make money with puts on stocks like GOOG or AAPL with huge premium is if you hit a home run, ie. a massive move on the part of the stock. Sure, theoretically there is "unbounded" risk, but in reality, that's impossible, unless you're a fool. Overnight gap ups and gap downs mayb occur, and a good trader will account for this.