Series 31 cheat sheet

Futures accounts are marked to market daily: realized and unrealized gains are credited and losses debited at each settlement, and losses cannot be deferred.

Initial margin (a performance bond, not a down payment) is typically 3-15% of contract notional value; equity falling below the maintenance level triggers a call to restore the initial level.

Leverage = contract notional value / initial margin. A $100,000 contract with $5,000 margin is leveraged 20 to 1.

P&L per contract = (exit price - entry price) / tick size x tick value. Always convert price movement to ticks before applying the tick value.

Basis = cash (spot) price - futures price. A strengthening basis helps a short hedger and hurts a long hedger; convergence to zero occurs at delivery.

Contango: futures trade above the cash price, consistent with storage, insurance and financing costs. Backwardation: futures trade below cash, often signaling nearby supply tightness.

A short hedge (selling futures) protects an owner of inventory against falling prices; a long hedge (buying futures) protects a buyer against rising prices.

CFTC and exchange speculative position limits cap reportable positions in designated markets; a bona fide hedger must obtain an approved hedge exemption to exceed them.

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

These are options on futures contracts. Exercise assigns the holder a long (call) or short (put) futures position at the strike; the premium is settled in cash.

Call intrinsic value = max(0, futures price - strike). Put intrinsic value = max(0, strike - futures price). Time value = premium - intrinsic value.

Long call breakeven = strike + premium. Long put breakeven = strike - premium. Short option breakeven is the mirror image.

The buyer pays the premium in full and posts no margin; maximum loss is the premium. The seller receives the premium but posts margin and may face unlimited risk on uncovered calls.

Delta measures premium change per one-point move in the underlying futures: calls run 0 to +1, puts run -1 to 0, and at-the-money options are near +/-0.50.

American-style options may be exercised any time before expiration; European-style options may be exercised only on the expiration date.

Options on futures generally expire on or before the underlying futures last trading day, so a position can leave the holder with a futures position after option expiration.

A covered call (long futures plus short call) caps upside in exchange for premium; a protective put (long futures plus long put) sets a floor on price.

A CPO operates a pool that trades commodity interests; a CTA advises others on commodity interest trading for compensation. Both must register with the CFTC and be NFA members unless an exemption applies.

Rule 4.13(a)(3) de minimis CPO exemption: aggregate initial margin and option premiums must not exceed 5% of pool net asset value, and aggregate notional value must not exceed 100% of NAV.

Rule 4.14(a)(10) CTA exemption: advice to 15 or fewer clients in the preceding 12 months and no holding out to the public as a CTA.

Rule 4.7 relief is available where the pool is offered only to Qualified Eligible Persons (QEPs); the QEP standard includes accredited investors and persons with at least $2 million in securities and other investments.

A CTA must deliver its disclosure document to prospective clients before accepting an account; the document must present actual, verifiable performance for the required period.

A CPO must distribute an annual report containing audited financial statements and performance to pool participants within 90 days of the pool's fiscal year end.

Pool participants and CTA clients receive monthly account statements showing net asset value, contributions, withdrawals and results of trading.

The typical fee structure is a management fee of roughly 1-2% of NAV per year plus an incentive fee (often 20% of new trading profits) subject to a high-water mark.

Notional value and margin-to-equity ratio are the standard leverage and risk measures used to compare managed futures programs.

The CFTC regulates commodity interests under the Commodity Exchange Act; the NFA is the CFTC-designated self-regulatory organization that administers registration, testing and arbitration.

Firms register on Form 7-R; individuals (APs, principals, branch office managers) register on Form 8-R with fingerprints and a background schedule.

An associated person is an individual who solicits customers or supervises solicitation and must be registered with an approved firm before conducting business.

NFA Rule 2-29 governs promotional material: no misleading statements, hypothetical results must be clearly labeled as hypothetical, and performance cited must be actual and current.

NFA Rule 2-30 requires members to obtain essential customer information and deliver the required risk disclosure statement before opening a commodity interest account.

CEA Sections 4b and 4o prohibit fraud and deceptive practices in connection with any commodity interest order or transaction.

CEA Section 4d requires customer funds to be segregated from the firm's own funds; commingling and using customer funds to margin proprietary trades are prohibited.

Books and records must be retained for five years, with the most recent two years readily accessible at the member's office.

NFA arbitration claims must be filed within two years of the act or transaction at issue; CFTC reparation proceedings are a separate customer remedy.