Here's a layman's answer – hopefully someone with detailed knowledge will either confirm / deny.
Shorting, IMHO, is an awfully brave move for we mere amateurs. Unlike buying a stock outright, if you've bet wrong (and the buyer of your shortsell, et al, think you are) your losses are theoretically infinite. I.e., if you buy a stock (like I did w/ Mooney Aerospace) and they go belly-up, you lose all that investment. BUT, if you short a stock that eventually triples, you lost 300% of your initial position… That said, as long as any return from reinvesting the proceeds of the short-sell exceed any gain in the stock you sold, you can still come out ahead.
I haven't short-sold any one stock, but did buy MYY which is an ETF (exchange traded fund) that shortsells midcaps. That way (I hope) my potential losses are minimzed.
WRT options – yes, you can still end up ahead on a put as long as the market (stock) declines. If you look at the option chains, you'll have a lot of choices… Say ABC corp is selling now for $100, you will find options that expire next week, next month, and for the next several months at least. Each of those dates will have various strike prices – buying the right to make the seller buy ABC at anywhere from (e.g.) $90 to $110.
It should make sense that the $110 option will cost more since there is already a $10 "in the money" difference; all else being equal it should cost at least $10 to buy that option. Depending on how low you want to buy, the "out of the money" options can be pretty cheap – a put option for ABC for $25 would be really cheap since no one would expect that much of a drop (again, this is all notional).
So… I've bought puts on both QQQQ (NASDAQ) and DJX (Dow Jones Industrials) that run through Jan 07 and Dec 06 respectively. The QQQQ is a longshot (very low strike price) that I got for .20 per share. For the DJX, I was a little more conservative (higher strike price), but that costs more in "insurance" and I had to pay .80 to buy each of those.
Finally, to answer your last question directly – you can make money at any point before the option has expired. So, if investors start thinking the market will drop my options would gain value and I could sell them at any time before they expire. Or, I could let them expire and, if the price is less than the strike price, I'll get the proceeds. Of course, if the stock is worth more than the strike price, it becomes worthless – there is no value in "forcing" someone to buy a stock at a lower price; "allowing" them to buy it at a lower price is a call option; a different deal.
