By Amber Hestla on December 26, 2012

Gold seems to always be in the headlines with bulls arguing for new all-time highs. There isnt much of an economic case for gold because it doesnt pay dividends or generate any type of earnings. Owning gold can actually be costly since there could be storage and insurance costs. Despite the disadvantages, gold bugs are undeterred, confident that gold will protect them against financial ruin.

Some investors consider silver as a substitute for gold. At various times in history, nations have tied their money supply to both gold and silver, and silver coins are popular among collectors. Like gold, silver is a precious metal that doesnt generate earnings or pay dividends. It is also often thought of as an inflation hedge although there seems to be little data to support the belief that either gold or silver are reliable short-term inflation hedges.

Now, both metals seem to be in bear markets and traders could benefit from that. Silver is more volatile than gold, making that the preferred trade. Measuring volatility with beta, a measure of how much an investment moves relative to the stock market, silver is three times as volatile as gold and about 50% more volatile than the S&P 500.

Silver reached $48.58 an ounce in April 2011 and has been in a downtrend since then. The metal is now about 40% below that price and seems to have formed a short-term top. Owning an inverse ETF will allow traders to profit from a decline in silver.

ProShares UltraShort Silver (NYSE: ZSL ) is designed to move twice as much as silver on any given day. Gains are magnified with a leveraged ETF and so are the risks. If silver loses 1% in a day, for example, ZSL should gain 2%. When silver posts a gain for the day, ZSL should lose twice as much that day.

ZSL has completed a double-bottom pattern on the weekly chart and momentum, shown with the stochastics indicator on the chart below, is bullish.

ZSL is just breaking out from the double-bottom and there is a great deal of potential left in this trade. Targets for price patterns are derived from the belief that price moves will be symmetrical. The $10 depth of the pattern shows a potential gain of $10 is expected after the breakout.

Traders can also develop time targets based on the concept of symmetry. This pattern has taken four months to form, and the price move that could deliver the $10 gain should be expected to take four months to unfold.

Armed with price and time targets, traders can look at options as a way to increase the potential gains and limit the risks of any trade. For ZSL, May options are available and would allow enough time to meet the chart pattern projections. However, out-of-the-money call options are expensive and offer little potential gain. The best value may be in the options with strike prices that are in-the-money. A May call with an exercise price of $51 is trading at about $5.45. At the target price of $60, this option would be worth at least $9, offering a potential gain of 65%.

Risk can be limited by exiting if the option closes below $4. You should not place a stop-loss order in advance on options that expire in several months. These markets are not very liquid and the stop-loss would likely be hit as a result of normal trading. Market makers will try to execute all orders they can see and your stop-loss would likely be filled at a price that proves to be the low of the day if it is visible. It is best to enter and exit these trades with limit orders to avoid large trading costs.

Silver appears to be resuming its long-standing downtrend and ZSL can be used to benefit from that.

Recommended Trade Setup:

— Buy ZSL May 51 Calls at $6 or less

— Exit with a limit order if the call closes below $4

— Set initial price target at $9 for a potential 50% gain in five months