Series 3 common mistakes
Series 3 · Understand the traps and how to avoid them.
Calculates a contract's dollar tick value by multiplying the price change by a memorized multiplier instead of the contract's specified unit-for example, using $250 for E-mini S&P 500 instead of $50, or treating crude oil as 100 barrels instead of 1,000-and then chooses the answer matching that arithmetic.
Candidates memorize one P&L formula and reuse it across contracts; contract units and tick sizes are not uniform.
What to do instead
At the start of each calculation, write the contract unit, tick size, and dollar tick value on scratch paper; practice building a table for equity index, energy, grain, and Treasury contracts and recompute P&L from the specification.
Explains that a futures customer retains counterparty credit exposure to the original opposite trader and that the exchange can set prices or guarantee profits.
Confuses exchange-traded futures with a bilateral forward; does not understand novation by the clearinghouse.
What to do instead
State the chain: the exchange standardizes the contract, and the clearinghouse becomes buyer to every seller and seller to every buyer; margin is a performance bond, not a price control.
Calls a long futures position a hedge for a producer who owns inventory and will sell it, arguing the producer is bullish; the correct offsetting position is short futures.
Candidates focus on forecast direction instead of the cash-market exposure the futures position must offset.
What to do instead
First write the cash position and sale date; then take the opposite futures position. Long cash/inventory means a short hedge; a future purchase need means a long hedge.
Computes profit on a short futures trade as exit price minus entry price, so a price rise is shown as a gain.
Carries over long-position P&L logic; the sign convention for shorts is not practiced.
What to do instead
Use short P&L = entry minus exit; test with one rising and one falling price scenario and check that a short gains when price falls.
States that a buyer of a futures option must post margin and can lose more than the premium, while the writer has no margin requirement.
Reverses buyer/writer roles or imports stock-option misconceptions; futures options require full premium from the buyer and margin from the writer.
What to do instead
Memorize: the buyer pays the premium in full, posts no margin, and has maximum loss equal to the premium; the writer receives the premium, posts margin, and a naked short call carries unlimited risk.
Treats a single bullish fundamental number-such as a lower-than-expected crop stocks estimate-as a complete buy signal without checking demand, exports, carryover, or what the market already expected.
Memorizes 'lower supply equals higher price' and skips the balance-sheet and expectations context that fundamentals questions test.
What to do instead
For each fundamental item, write supply, demand, carryover, and the expected/consensus figure; ask whether the news is already priced in before choosing a direction.
Enters an order for a customer based on a spouse's or friend's verbal instruction without written third-party authorization, or trades a customer's account at the customer's oral request without a signed discretionary authorization.
Assumes verbal consent is sufficient; NFA rules require written authorization for third-party and discretionary accounts.
What to do instead
Before entering the order, confirm the account has a written third-party trading authorization or a signed discretionary authorization; if not, refuse and obtain the writing.
Opens a futures position believing the initial margin is the most cash that can be lost, and fails to predict a variation margin call when equity drops below maintenance margin.
Conflates initial margin with a purchase price and maintenance margin with the call level; margin is a performance bond.
What to do instead
Model equity after an adverse move; know that maintenance margin is the trigger and the call restores equity to the initial margin level unless the firm requires more.
Places a buy stop below the current market or a sell stop above it, or assumes a stop-limit order guarantees a fill once the stop price trades.
Confuses stop with limit orders and memorizes 'buy stop' without the above-market condition; a stop-limit can be skipped in a fast market.
What to do instead
Draw the market price: buy stops go above, sell stops below; a stop becomes a market order when touched, while a stop-limit becomes a limit order and may not execute.
Attributes rulemaking and enforcement of the Commodity Exchange Act to NFA, or tells a customer to file an arbitration claim with the CFTC.
Overlapping federal and self-regulatory roles are blurred; candidates memorize 'regulator' generically.
What to do instead
Separate the roles: the CFTC is the federal agency that administers the Commodity Exchange Act; NFA is the industry self-regulatory organization for registration, ethics, and arbitration of customer disputes.