How is carbon monoxide produced and how does it act as a poison?

Carbon monoxide is produced by incomplete combustion of hydrocarbons.

Haemoglobin in your blood is not a stable compound, such that it can transport oxygen around your body. What carbon monoxide does is to react with the haemoglobin to form carboxyhaemoglobin, which is a stable compound, and you wouldn't get enough oxygen, which then you die of asphyxiation (if I didn't forget anything).