Series 3 cheat sheet

A futures contract is a standardized, exchange-traded, cleared agreement to buy or sell a fixed quantity and grade of a commodity in a specified delivery month; price is the only term the parties negotiate.

A long position profits when price rises; a short position profits when price falls; every contract always has one long and one short.

Tick value = minimum price fluctuation x contract unit. Dollar P&L = price change x contract unit x number of contracts, with sign reversed for shorts.

Notional value = futures price x contract unit; one contract controls far more value than the margin that secures it.

Forwards are privately negotiated, non-standardized and carry counterparty credit risk; futures are standardized, fungible and guaranteed by a clearinghouse.

Basis = cash (spot) price minus futures price. Basis converges toward zero at delivery as cash and futures prices meet.

Open interest counts outstanding contracts once, not once per side; it rises when new longs and new shorts both enter and falls when both liquidate.

A spread is a simultaneous long and short in related contracts: intramarket (same commodity, different months) or intermarket (different commodities or exchanges).

Clearinghouse novation makes the clearinghouse buyer to every seller and seller to every buyer, mutualizing default risk through margin and guarantee funds.

The CFTC, created by the Commodity Futures Trading Commission Act of 1974, is the federal regulator that administers and enforces the Commodity Exchange Act.

The NFA, created in 1982, is the industry self-regulatory organization handling registration testing, rule enforcement and arbitration; membership is mandatory for FCMs, IBs, CPOs and CTAs.

U.S. futures exchanges operate as CFTC-designated contract markets (DCMs); clearing is performed by derivatives clearing organizations (DCOs).

CME Group lists CBOT grains, CME currency and equity index products, NYMEX energy and metals, and COMEX metals; ICE Futures U.S. lists softs (sugar, coffee, cocoa, cotton, FCOJ) and the U.S. Dollar Index.

CBOT corn, soybeans and wheat contracts are 5,000 bushels; the minimum tick is 1/4 cent per bushel, equal to $12.50 per contract.

NYMEX WTI crude oil is 1,000 barrels with a $0.01 tick = $10.00; NYMEX natural gas is 10,000 MMBtu with a $0.001 tick = $10.00.

COMEX gold is 100 troy ounces with a $0.10 tick = $10.00; silver is 5,000 troy ounces with a $0.005 tick = $25.00.

CME currency sizes: EUR 125,000 (0.00005 tick = $6.25), JPY 12,500,000 (0.0000005 tick = $6.25), GBP 62,500 (0.0001 tick = $6.25), CAD 100,000 (0.00005 tick = $5.00).

CBOT Treasury bond futures are $100,000 face with a 1/32 tick = $31.25; 10-year note is $100,000 face with a 1/64 tick = $15.625; E-mini S&P 500 is $50 x index with a 0.25 tick = $12.50.

Short hedge: sell futures against inventory or an expected sale; a decline in the cash price is offset by a gain on the futures position.

Long hedge: buy futures to fix the cost of a later purchase; a rise in the cash price is offset by a gain on the futures position.

Net hedge result = cash market gain or loss + futures market gain or loss; a perfectly offsetting hedge leaves only basis risk.

Effective selling price for a short hedger = futures price at hedge initiation + basis when the hedge is lifted.

Effective purchase cost for a long hedger = futures price at hedge initiation + basis when the hedge is lifted.

Hedge ratio = (value of the cash position x its price sensitivity or beta) divided by (futures price x contract unit).

A cross hedge uses futures on a different but correlated commodity when no matching contract exists; correlation below 1.0 raises basis risk.

Rolling a hedge means closing the expiring contract and re-establishing the position in a deferred month; the month-to-month price difference is the roll cost or gain.

A speculator takes price risk without an offsetting cash position, supplying liquidity and absorbing the risk transferred by hedgers.

Long futures: loss is limited to the full contract value (price falling to zero), gain is unlimited; short futures: gain is limited to the contract value, loss is unlimited.

P&L = (exit price - entry price) x contract unit x number of contracts, less commissions, with the sign reversed for short positions.

Leverage: a small margin deposit controls a large notional value, so a modest percentage price change can produce a very large percentage return on margin.

Scalpers hold positions for seconds or minutes; day traders close out before the session ends; position traders hold for days or weeks.

In futures parlance a straddle is an intramarket spread: long one delivery month and short another month of the same commodity, profiting from a change in the month-to-month price difference.

An intermarket spread pairs a long and short in related commodities (corn vs. wheat) or the same commodity on two different exchanges.

Spread positions usually require lower margin than two outright positions because the legs partially offset in price volatility.

A call gives the right to buy the underlying futures contract at the strike; a put gives the right to sell; the buyer pays a nonrefundable premium and may simply abandon the option.

Buyer risk is limited to the premium paid; the writer collects the premium, posts margin, and bears a potentially unlimited obligation.

Intrinsic value: call = max(futures price - strike, 0); put = max(strike - futures price, 0). Time value = premium - intrinsic value.

In-the-money call: futures above strike. In-the-money put: futures below strike. At-the-money: futures equals strike. Out-of-the-money is the reverse of in-the-money.

Exercising a futures option creates a long futures position (call) or a short futures position (put) at the strike price, unless the contract is cash settled.

Grain option premiums are quoted in cents per bushel: a 20-cent premium on a 5,000-bushel contract costs $1,000.

Long call plus short put at the same strike and expiration is a synthetic long futures position; the reverse combination is a synthetic short.

Time decay accelerates as expiration approaches; an option that finishes with no intrinsic value expires worthless.

Delta ranges from 0 to 1 for calls and from -1 to 0 for puts; at-the-money options have absolute deltas near 0.5.

Fundamental analysis forecasts price from supply and demand: production, beginning stocks, imports, consumption, exports, ending stocks and government policy.

Stocks-to-use ratio = ending stocks divided by total use; low ratios accompany tight supplies and high prices, high ratios accompany ample supplies and low prices.

Scheduled government reports (USDA WASDE, quarterly Grain Stocks, Cattle on Feed) are key events; markets position ahead of the release and react to the surprise versus expectations.

Technical analysis assumes price discounts all known information and that trends persist until evidence of reversal appears.

An uptrend shows successively higher highs and higher lows; a downtrend shows lower highs and lower lows. Support is a floor where buying appears; resistance is a ceiling where selling appears.

Moving averages smooth price: price crossing above a rising average is bullish, and a shorter average crossing below a longer average is a bearish signal.

Volume and open interest confirm moves: rising open interest with rising price suggests new longs, while falling open interest with rising price suggests short covering.

Reversal and continuation patterns include head and shoulders, double tops and bottoms, triangles, flags and gaps; breakouts should be confirmed by volume.

The CFTC Commitment of Traders report separates commercial (hedging) from non-commercial (speculative) positions; extreme speculative positioning is often read as a contrarian signal.

Before the first trade, the customer must receive and sign the risk disclosure statement and sign the customer agreement.

In a general joint account both parties must authorize trading and withdrawals, and each is jointly and severally liable for the whole account.

Joint tenancy with right of survivorship passes the deceased owner's interest to the survivor; tenancy in common passes it to the deceased owner's estate.

Corporate, partnership and LLC accounts require documents proving the entity's existence and the authority of the individuals who will trade it.

A discretionary account requires a written power of attorney from the customer plus written approval by a designated firm principal before any discretionary order is accepted.

Customer funds must be segregated from the FCM's own funds and may not be used to finance firm operations or pay firm debts.

Confirmations must be issued for each trade showing price, quantity, delivery month and commission; monthly statements must show open positions and account equity.

NFA Compliance Rule 2-30 requires FCMs and IBs to know the essential facts about each customer, including financial condition, trading experience and objectives.

A CTA trading a customer's account must provide a CFTC/NFA-filed disclosure document and a signed management agreement before trading begins.

Futures margin is a performance bond, not a down payment or loan; it is a good-faith deposit securing contract performance, and the customer does not own the contract value.

Exchanges set minimum initial margin levels; an FCM may require more from its customers but never less than the exchange minimum.

Maintenance margin is set below initial margin; if equity falls below it, a margin call is issued to restore equity to the initial level.

Daily mark-to-market credits gains and debits losses in cash; account equity = cash balance + unrealized profit - unrealized loss.

Hedge margin for bona fide hedgers and spread margin for offsetting positions are typically lower than speculative outright margin.

Long options are paid for in full and carry no margin loan; option writers must post and maintain margin.

If a margin call is not met the FCM may liquidate positions without further consent, and the customer remains liable for any resulting deficit.

Example: long one 5,000-bushel corn contract at $4.50 with $1,500 initial margin; a 30-cent price decline produces a $1,500 loss that wipes out equity.

Market order: immediate execution at the best available price and highest priority among order types.

Limit order: buy at or below the limit price, sell at or above it; it may never be filled if the market does not reach the price.

Stop order: a buy stop is placed above the market and a sell stop below it; the order becomes a market order when the stop price trades.

A stop-limit order becomes a limit order once triggered and therefore may not fill in a fast, gapping market.

Time-in-force instructions include day, good-till-canceled, good-till-date, fill-or-kill and all-or-none; market-if-touched and MIT-type orders convert to market orders when a favorable price trades.

Each order must be time-stamped and recorded on an order ticket; an out-trade is a mismatched trade that must be reconciled promptly.

Delivery sequence: first notice day (longs may receive delivery notice), then last trading day, then delivery of the actual commodity by warehouse receipt or transfer.

An exchange for physicals (EFP) swaps a futures position for a cash position and is commonly used by hedgers to make or take delivery outside the normal delivery process.

The CME settlement price is the volume-weighted average of trades in the closing period; daily price limits and circuit breakers halt or restrict trading during extreme moves.

The Commodity Exchange Act is the governing statute; the CFTC administers it and has jurisdiction over futures and options on futures.

The NFA handles registration, testing, arbitration and much enforcement; membership is required for FCMs, IBs, CPOs, CTAs and their associated persons.

Registration categories include FCM, IB, CPO, CTA, floor broker, floor trader and associated person; an AP must be sponsored and pass the Series 3.

Prohibited conduct includes wash trades, fictitious trades, bucketing of orders, trading ahead of customer orders, and false or misleading reports.

Position limits and accountability levels cap speculative positions; bona fide hedge positions may be exempt with exchange or CFTC approval.

Books and records generally must be kept five years, with the most recent two years readily accessible.

Promotional material must not be misleading; hypothetical or simulated results require a prescribed disclaimer, and past performance cannot be presented as indicative of future results.

A signed pre-dispute arbitration agreement generally channels customer disputes to NFA arbitration; the CFTC reparations program is a separate forum.

An FCM must maintain adjusted net capital of at least 8% of customer segregated funds, subject to a minimum dollar requirement, and must segregate customer funds.