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Commodity options control futures contracts, which, in turn, control physical commodities. A futures contract is a pure bet on price changes, and it doesn’t take a lot of volatility to make money. If you have the finances and temperament, futures are a great vehicle.

But most people prefer to sleep well at night. That’s why commodity options are so popular; however, you will pay a price to get a little peace of mind. Because you pay a premium to buy an option, you will lose money unless the price moves.

If you do decide to take the safer route and trade commodity options, I have a few tips that will help you pick the right ones.

Next: Buy Options on Volatile Commodities

Tip #1: Buy Options on Volatile Commodities

Many people believe commodity prices are more volatile than stock prices. However, the reverse is true. Commodity prices usually move slowly, so try to buy options on volatile commodities or those with the potential to increase their volatility.

Look for commodities that have been in a long trading range for a while and are starting to break out of that trading range.

Next: Buy Cheap, Undervalued Options

Tip #2: Buy Cheap, Undervalued Options

As a rule of thumb, I say avoid buying options costing more than $400. There are two advantages to buying cheap options:

1. The percentage increase can be tremendous.

2. You’ll pay very little for , so you will minimize the cost of buying an option.

No matter how strongly you feel about a commodity, do not overpay for the option. Use a pricing program to determine an option’s fair value before you buy.

Next: Buy as Much Time as You Can

Tip #3: Buy as Much Time as You Can

Longer-term options allow more time for the commodity to make its move, and you’ll have a better chance of hitting a home run. They’re sometimes hard to find, but look for low-priced, undervalued options with at least two months remaining before expiration.

Compare options by figuring the weekly cost of depreciating time value. It’s a good yardstick.

Next: Buy Options That Are Within Range

Tip #4: Buy Options That Are Within Range

The underlying futures contract must be within range of the strike price. It’s not enough to find a cheap option with a lot of time remaining. It’s still a bad bet if the commodity price is too far away.

Of course, “within range” is open to interpretation, and there isn’t a rule of thumb to cover it. But check your charts to see if the commodity future contract has been as high (if you’re buying call options) or low (if you’re buying puts) as the strike price.

Additionally, you should buy calls on pullbacks and puts on rallies.

Next: Be Patient

Tip #5: Be Patient

This may be the toughest rule of all to follow, but you must be patient and put in a lot of hard work or you won’t have much chance of success trading commodity options.

Underpriced options are not easy to find. If they were, everyone would buy them, so they wouldn’t be underpriced for long. It could take days to find them, but don’t compromise your rules and settle for less. Only patient traders get the big payoffs.

Next: Let it Ride

Tip #6: Let it Ride

To be successful at buying options, you must hit home runs — options that generate 500% or greater returns. If you have an option that increases more that 1,000%, you can lose the next 10 trades in a row and still be ahead.

To hit a home run, you must let your position ride, but at the same time, you must not let big profits slip away. Here you need to use a on the underlying commodity, and exit your position when it starts to move against you.

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