Establish a setting for the short story. The setting is the time and place in which the story unfolds. There are a few things to keep in mind in creating a realistic setting, including time, date and geographic location, as well as weather, atmosphere and social conditions. It is usually best to establish the setting early on so as to not leave the reader guessing or confused.
Create realistic characters. The main character of a fictional story is called a protagonist and the character that opposes him or her is called the antagonist. Create these characters based on the three different character types: individual (complex, well-rounded personalities), developing (dynamic, personalities that change over the course of the story), or static (often a stereotype, personalities that have one or two personality traits that never change.)
Establish the conflict of the short story. The conflict is essentially the major issue of the story; it can occur once or more frequently over the course of the tale. Conflicts can be internal or external: internal, or psychological, means the conflict is within one character, as when a character is torn between good and evil, whereas external refers to conflict between a character and an outside force, such as another character, society or a set of circumstances.
Determine the point of view, or the perspective from which the story is told. There are four main types of point of view: innocent eye (child's perspective); stream of consciousness (as though the reader is inside the protagonist's mind, reading all his thoughts); first person (the perspective of any given character); and omniscient ("all-seeing," as when the author narrates from any or all of the characters' perspectives and has access to every character's thoughts.)
Develop the plot of the short story. There are five parts that should be presented: 1) Introduction, where the plot is set in motion and characters are introduced, 2) Rising Action, in which the events gain complexity and the crisis is revealed, 3) Climax, the highest point or turning point of the story, 4) Falling action, after the climax, when events or complications begin to get resolved, 5) Denouement which is the final outcome of the story.
Establish the theme of the short story. This is the take-away message, like "be careful what you wish for." A well-written short story does not need to spell out the theme, but rather should make it clear through the unfolding of the plot and the development of characters.