Buy Underpriced Options

When you think you know where the price of your commodity is headed, you can buy underpriced options to give yourself a statistical edge.

Here's all you have to do to buy underpriced options:

Find options where the current market price of the option is less than its computed fair value (theoretical price). These are underpriced options. They don't stay that way for long. (Work with your broker to find underpriced options.)

Primarily look to buy options that don't expire for at least 30 to 60 days, or more. You can often find underpriced options when they have more time remaining. As an option approaches expiration, its premium almost always falls in line with its computed fair value. This is especially true during the last 2-3 weeks before expiration.

For this reason, it is difficult to find underpriced options which expire within 30 days. So, make sure that the options have at least 30 days remaining, or more.

Note: Practice good money management. For instance, If you are wrong about the direction, you might want to sell your options if they lose half of their value.

Buying underpriced options gives you four advantages:

1. It shifts the probabilities in your favor. When an option's premium is equal to the fair value, no one has an advantage. But when you buy an option with a premium that is less than the fair value, you have a slight "house advantage", just like a casino.
2. It reduces time decay (because you are paying for less time value).
3. It limits your risk and reduces losses when you are wrong about the direction. Since the option is already underpriced, if there is an adverse price move, the option will lose less value than it would otherwise.
4. It increases your profits when you're right about the direction. As the option's premium moves back in line with the fair value, this helps your position.