Undergraduate supervisor asked me to join his group for grad school. How do I politely say I'm also considering other options?
Just explain to him what you have said here (in greater detail, of course).  If you are applying to graduate school, you are really going to want a strong recommendation from this professor.  You can't get that without giving a clear statement of what you are planning to do.  The professor should not be offended; faculty members  deal with these kinds of situations regularly.