How is it different from selling an option on a stock you own?
When you sell the option, you still own the stock, you are selling the right to buy it from you at a set price.
And when you sell the PUT, you are selling someone, for a premium, the right to buy the stock from you for a certain predetermined price by a certain date. If the stock goes down in price between the date you sold the PUT and the expiration of the PUT then the buyer has no incentive to purchase the stock from you at the agreed price (which is now higher than on the open market) and you earned that premium. However, if the stock price goes up after you sell the PUT, the purchaser will call you out and execute his right to buy at the lower predetermined price and he will make a profit and you will take a loss. Your loss will be the difference in the current price (as you have to buy it at current market price, unless you already hold those shares to sell) minus the agreed price of the stock which the buyer agreed to when he bought the PUT; minus the premium he paid you for the option (PUT). Where you lose big is when you sell a naked put (meaning you are selling a stock put on stock you don’t already own) and the price skyrockets putting you at great financial risk.
As an example. I sell you a March 2021 PUT on a stock, say for example, RIOT. It is currently trading at $18.00. I do not own the stock but I sell you a naked PUT for 10 contract (1000 shares total) for a total cost of 2 dollars a share that expires in March. (You pay me $2000.00) This gives you the right to purchase 1000 shares of RIOT any time before the contract expiration date at the agreed price of $17.00. If the stock explodes to $30.00/share before the contract expires, you then buy it from me for $17,000. Your profit would be $13,000 (you bought it for $17,000 when it was worth $30,000) minus your cost for the put contract ($2000) so you just made $11,000 by risking $2,000.
My loss would be 30,000 because I sold the naked Put (remember I did not own them when I sold the PUT to you so I had to buy them at market rate the day you exercised your option) minus the amount you paid me for the PUT option, $2000; making my total loss $28,000.
Should the stock price decline from the option price the PUT will expire worthless to the buyer and I, the seller will pocket the PUT cost in this case, $2000.
It is a high risk game, much more so for the seller than the buyer as the buyer is only risking the amount of the PUT, in this case $2000 while the seller is risking a theoretically unlimited amount depending on the stock price elevation above the contract price. So in the case of Gamestock if they sold PUTS at $8.00 when the stock price was $6.00 and before expiration of the PUT the price jumped to $300/share and they got called-out they still have to sell the stocks at $8.00 but they have to buy them at $300.00, rendering them a bridge-jumping degree of financial loss.