You could buy the precious metal itself… You could buy an ETF, like StreetTRACKS Gold (GLD: NYSE), that trades at 1/10 the price of gold, or you could trade risky gold futures. But, as a penny investor, maybe you don’t have the big bucks to shell out for these trades.

Don’t give up hope just yet. Little known “commodity options” offer you a cheap way to play your favorite commodities.

Let’s use gold as an example. Many of these commodity options allow you to play gold for less than what an average penny stock costs, and best of all, your risk is always known and strictly limited. Here’s how these commodity options work…

I’m sure you’ve heard of stock options. A stock option is a contract that gives you the right to buy or sell 100 shares of a company at a certain price, on a certain date. For that contract, you’ll pay a “per share fee,” called a premium.

For example, let’s pretend that Company X is trading today for $50 a share. You predict that Company X will trade above $52 share by November 1. So, you buy a call option on Company X that looks something like this…

“Company X November $52 Calls”

Depending on the volatility of Company X, you’ll probably pay a premium of something in the range of 50 cents to $2.50 per share for this right. Multiply that per share premium by the 100 shares that the option controls and you’re looking at a total cost of $50-$250 (50 cents x 100 shares…or $2.50 x 100 shares). If Company X goes up to $55 before your option expires, you’ll multiply that $250 investment many times over.

As a penny investor, buying “commodity options” allows you to do the same thing for gold. But, instead of each gold option contract controlling “100 shares” of a company, like a stock option does, you’ll control 100 ounces of gold.

As I write this, some of these gold commodity options trade for as little as $1.20 an ounce. If you buy some of these options and turn out to have made the correct prediction on gold’s upward movement, you’ll have an easy way to make 2-3 times your money in a short period…all for less than $120 per option contract.

And it doesn’t stop with gold. You can play direct commodity options on all of your favorite commodities…from gold, to silver, to soybeans, cattle, wheat, corn and even orange juice.

If you’d like to learn more about how these commodity options work, the Chicago Board of Trade offers a neat tutorial. In the end, you’ll have a “penny” way to play the commodity of your choice.

To your wealth,
Joe Schriefer
September 18, 2007

P.S.: To help our readers maximize these penny commodity options, we hired Kevin Kerr, the best commodity trader we could find. Kevin is a professional trader, inside and out.

In one of his first recommended trades, Kevin showed his readers how to trade options on 100 ounces of gold for just $1.40 an ounce. Fourteen days later, Kevin recommended selling that option for $2.70 an ounce, delivering his readers 93%.

Penny Commodities was originally featured in the Penny Sleuth.