Your FREE Series 3 Flashcards 2026 – 200+ Cards

A standardized, exchange-traded, legally binding agreement to buy or sell a set quantity and grade of a commodity at a set price for delivery in a specified month.

A good-faith deposit ensuring contract performance — NOT a loan or down payment. Contrast: securities margin IS a loan.

Cash price minus futures price: $\text{Basis} = \text{Cash} - \text{Futures}$. Negative ('under') in a normal carry market.

A buyer's position — obligated to take delivery; profits if price rises.

A seller's position — obligated to make delivery; profits if price falls.

Becomes buyer to every seller and seller to every buyer (novation), guaranteeing performance and eliminating counterparty credit risk.

The basis approaches zero as a contract nears expiration at the par delivery point — what makes hedging work.

A selling hedge used by an owner/producer fearing a price decline; sell futures now. 'Sell what you'll sell.'

A buying hedge used by a future buyer fearing a price rise; buy futures now. 'Long the need.'

Initial opens a position; maintenance is the minimum equity kept. Falling below maintenance triggers a call — restore to INITIAL.

A private, customized OTC agreement for future delivery; not exchange-traded and not clearinghouse-guaranteed (each party bears credit risk).

The exchange sets size, grade, delivery months, and locations; only price is negotiated. Standardization makes contracts fungible.

A member firm authorized to clear trades through the clearinghouse and guarantee its customers' performance.

Closing a position by the equal and opposite trade in the same contract month — a long sells, a short buys. How most positions exit.

Total outstanding (not yet offset) contracts. Rises only when a new buyer AND new seller open; falls when both offset.

The number of contracts traded during a period — a single contract can trade many times in one day.

The economic function by which a public, competitive futures auction reveals a consensus future price.

The core economic purpose: hedgers transfer unwanted price risk to speculators who accept it for profit.

Costs of holding a physical commodity: storage, insurance, and interest/financing (SIF).

Distant months priced higher than nearby; futures > spot. Reflects carrying charges; spread capped at full carry.

Nearby months priced higher than distant; spot often > futures. Signals tight nearby supply; no upper limit on the spread.

The current price for immediate delivery of the physical commodity.

Nearby (front) = closest expiring contract; deferred (distant/back) = a later-expiring contract.

The smallest allowable price increment for a contract, set by the exchange.

The location/grade specified for delivery at the contract price; the basis converges toward zero here.

First day a short can tender a delivery notice. A long who doesn't want delivery must offset BEFORE this day.

The final day a contract may be traded before expiration.

A participant with a cash-market position who uses an opposite futures position to reduce price risk.

A participant with no offsetting cash position who assumes price risk for profit and provides liquidity.

Controlling a large contract value with a small margin (performance bond) deposit — magnifies both gains and losses.

Price discovery, Risk transfer, and Liquidity.

Futures margin = a performance bond (no interest, not borrowed); securities margin = a loan from the broker.

Settlement to a final cash value vs. a reference index (e.g., stock-index futures) — no physical commodity delivered.

A demand to restore equity back up to the INITIAL margin level (not just maintenance) when equity falls below maintenance.

The daily cash adjustment reflecting mark-to-market gains or losses.

Daily crediting/debiting of accounts to the day's settlement price — so futures P&L is realized every day.

The official closing/reference price used for daily mark-to-market and next-day price limits.

The maximum price move allowed in one session from the prior settlement.

The market halts at the limit with no opposing orders; a trader may be UNABLE to offset while margin calls continue.

A coordinated, market-wide trading halt triggered by large price moves (common in stock-index futures).

$\max(F - K,\ 0)$: the in-the-money amount of a call. Never negative.

$\max(K - F,\ 0)$: the in-the-money amount of a put. Never negative.

Premium minus intrinsic value; decays to zero by expiration (time decay).

The price an option buyer pays the writer: $\text{Premium} = \text{Intrinsic value} + \text{Time value}$. The buyer's max loss.

The change in an option's premium per 1.00 change in the underlying futures price (~0.5 ATM, ~1 deep ITM, ~0 deep OTM).

Execute immediately at the best available price — guarantees execution, NOT price.

Execute only at a specified price or better. Buy limit below market, sell limit above; guarantees price, not execution.

Becomes a MARKET order when the stop is touched. Sell stops below the market, buy stops above. Guarantees execution after trigger, not price.

Becomes a LIMIT order when the stop is touched — protects price but may NOT fill in a fast market.

Becomes a market order when touched. Buy MIT below market, sell MIT above — the mirror of a stop's placement.

Executed at or near the close. Still a market order — only the timing window is set.

Remains active session after session until executed or canceled.

Expires at the end of the trading session if unfilled. The default duration.

Must be filled entirely and immediately or canceled — no partial fills.

Fill whatever can be filled immediately; cancel the rest. Partial fills ARE allowed (unlike FOK).

Two linked orders; executing one automatically cancels the other (e.g., a profit limit paired with a protective stop).

For the same side, a stop and a limit sit on OPPOSITE sides: buy stop above / buy limit below; sell stop below / sell limit above.

Forecasting price from past price, volume, and open-interest patterns. Assumes price discounts everything, trends persist, history repeats (PTH).

A price level where buying tends to halt a decline (a floor).

A price level where selling tends to halt an advance (a ceiling).

An uptrend line is drawn under rising lows; a downtrend line over falling highs.

A reversal chart pattern; a close below the neckline signals a bearish reversal (the inverse signals bullish).

Plots price movement only with columns of X's (rising) and O's (falling) — ignores time and volume.

Rising price + rising volume + rising open interest confirms a strong trend; divergence is a warning.

Forecasting price from supply/demand causes. Tighter supply or more demand = bullish; more supply or less demand = bearish.

The marketing year from one harvest to the next; key to grain fundamentals.

Old-crop stocks left at the start of a new crop year. High carryover = ample supply = bearish.

Government supply/demand reports that are major scheduled market movers; larger-than-expected stocks are bearish.

A graph of interest rates across maturities: normal (long > short), inverted (short > long, recession signal), or flat.

Interest rates and bond (and bond-futures) prices move opposite: rates up → prices down; rates down → prices up.

Short-term rates ABOVE long-term rates — unusual, often watched as a recession signal.

The Fed most directly drives short-term rates; long-term rates respond more to inflation expectations.

Bona fide hedgers may be exempt from speculative position limits and get lower margin; speculators face the limits and higher margin.

An account where someone else trades without prior per-trade approval; requires written power of attorney and heightened supervision.

Used by an owner/producer fearing a price decline — sell futures now. Benefits from a strengthening basis.

Used by a future buyer fearing a price rise — buy futures now. Benefits from a weakening basis.

A hedge placed in advance of an expected future cash transaction (e.g., a crop still in the ground).

The risk that the basis changes unexpectedly, making a hedge imperfect — the residual a hedger keeps.

Basis becomes more positive / less negative; benefits the SHORT hedger.

Basis becomes less positive / more negative; benefits the LONG hedger.

$\text{Net price} = F_{\text{initial}} + \text{Basis}_{\text{final}}$. Once hedged, the ending basis is the only variable left.

A hedge with NO basis change (not no price change) — price risk fully neutralized. Rare in practice.

Hedging a cash commodity with a futures contract on a related (not identical) commodity.

Long one contract and short a related contract; speculates on the price RELATIONSHIP, not absolute direction.

You profit when the leg you are LONG gains relative to the leg you are SHORT — solve each leg's P&L and sum them.

Same commodity, different delivery months. Governed by carrying charges.

A calendar spread reflecting carry; in a normal market the distant-over-nearby premium cannot exceed full carry.

Commonly long nearby / short distant; profits when the nearby gains relative to the distant (premium narrows in a normal market).

Commonly long distant / short nearby; profits when the distant gains relative to the nearby (premium widens).

The same or similar commodity traded on two different exchanges.

Two different but related commodities (e.g., corn vs. wheat; gold vs. silver).

Soybeans vs. soybean meal and oil — the processing margin of crushing beans.

Crude oil vs. refined products (gasoline, heating oil) — the refining margin.

Natural gas vs. electricity — the margin of generating power from gas.

Lower margin than outright positions, because the two legs partially offset and the net risk is smaller.

A single long or short futures position (not a spread); speculates on absolute price direction.

Long: $(\text{Exit} - \text{Entry}) \times \text{size} \times \#$. Short: $(\text{Entry} - \text{Exit}) \times \text{size} \times \#$.

$\dfrac{\text{Net profit}}{\text{Initial margin}}$. Leverage magnifies the percentage outcome.

A trader seeking many small intraday profits in seconds to minutes; a major liquidity provider.

Holds positions over days/weeks/months based on a sustained trend view — the longest horizon.

Opens and closes all positions within the same session (no overnight risk).

Futures losses are NOT limited to the margin posted — an adverse move can cost more than the deposit.

The right (not the obligation) to go LONG the underlying futures at the strike.

The right (not the obligation) to go SHORT the underlying futures at the strike.

Pays the premium, owns the right, and chooses whether to exercise. Max loss = the premium.

Receives the premium and has the obligation to perform if assigned; risk can be large or unlimited.

The fixed price at which the option may be exercised into a futures position.

American = exercisable any time before expiration; European = only at expiration. Most U.S. futures options are American.

Futures price above the strike: $F > K$.

Futures price below the strike: $F < K$.

An option with no intrinsic value — its entire premium is time value.

$K + P$ (strike plus premium).

$K - P$ (strike minus premium).

Bullish; max loss = premium; max gain = unlimited; breakeven = $K + P$.

Bearish; max loss = premium; max gain = $K - P$; breakeven = $K - P$.

Max gain = premium; max loss = UNLIMITED (the only position with truly unlimited loss).

Max gain = premium; max loss = $K - P$ (large but capped — the future can only fall to zero).

Hedges a long position by creating a price FLOOR: net selling price = $K_{put} - \text{premium}$.

For a future buyer; creates a price CEILING ($K_{call} + \text{premium}$) while keeping the downside benefit.

Short a call against a long position; generates premium income but caps upside at the strike.

Long and short options of the same type, same expiration, different strikes.

Buy lower-strike call / sell higher-strike call. Max loss = the debit; max gain = strike diff − debit.

Buy higher-strike put / sell lower-strike put. A debit, bearish spread.

Debit spread: max loss = the debit paid. Credit spread: max gain = the credit received. Both cap each end.

Same strike, different expirations; profits mainly from faster decay of the near-term short option.

Buy a call AND a put at the same strike; profits on a big move either way. BE = $K \pm$ total premium.

Buy an OTM call and an OTM put at different strikes — cheaper, but needs an even bigger move.

Holder exercises → the writer is assigned the OPPOSITE futures position. Call → long future; put → short future.

An option is a wasting asset; time value erodes toward zero, accelerating near expiry. Hurts the buyer, helps the writer.

Higher implied volatility → higher premiums (more chance of big moves); it affects time value, not intrinsic value.

A covered call's loss is NOT unlimited (the long position covers it); a naked call's loss IS unlimited.

Long futures + long put + short call (same strike/expiry) to lock a risk-free relationship when options are mispriced (put-call parity).

A futures hedge locks price both ways; an option hedge costs a premium but keeps the favorable move.

5,000 bushels; quoted in cents/bushel, so a 1-cent move = $50 per contract.

100 troy ounces; a $1 move = $100 per contract.

1,000 barrels; a $1 move = $1,000 per contract.

$(\text{Today's settle} - \text{Prior settle}) \times \text{contract size}$.

$(\text{Prior settle} - \text{Today's settle}) \times \text{contract size}$.

$\text{Spread P\&L} = \text{P\&L}_{\text{long leg}} + \text{P\&L}_{\text{short leg}}$ — solve each leg with its sign and sum.

After locked-limit days, exchanges may widen the allowable daily price range so the market can find equilibrium.

A smoothed average price used to identify trend direction; it lags price (confirms rather than predicts).

Tighter supply or more demand (drought, drawdowns) = bullish; more supply or less demand (record harvest, high carryover) = bearish.

In a normal market, the distant-over-nearby premium cannot exceed full carrying charges — arbitrage enforces the cap.

$\text{Price} \times \text{contract size}$ (or $\text{Index} \times \text{multiplier}$ for index futures).

Commodity Futures Trading Commission — the independent federal regulator that administers the Commodity Exchange Act.

The federal statute governing futures trading, administered by the CFTC.

National Futures Association — the industry-wide self-regulatory organization (the only registered futures association). Membership is mandatory.

A CFTC-regulated futures exchange and front-line SRO.

A firm that accepts orders AND customer funds for futures; must segregate funds and meet net-capital rules.

Solicits/accepts orders but does NOT hold customer funds — introduces business to an FCM.

Operates under a guarantee agreement with ONE FCM; needs no own minimum net capital.

Must meet its OWN minimum adjusted net capital; may introduce to multiple FCMs.

Operates a pooled investment vehicle that trades futures; delivers a Disclosure Document and reports to participants.

Advises others on futures trading for compensation; delivers a Disclosure Document.

An individual who solicits orders/customers/funds or supervises such persons; must pass the Series 3.

Does the firm accept/hold customer money? FCM = yes (segregates); IB = no (introduces to an FCM).

A CPO Operates a Pool (pools money); a CTA gives Advice. Both follow Part 4 disclosure rules.

An individual who executes orders on the exchange floor/systems for others.

An individual who trades for his/her own account on the floor/exchange systems.

The individual registration application (also for firm principals); firms file Form 7-R via the NFA.

Grounds under CEA §8a that bar or condition registration (e.g., certain felonies, prior bars, false statements).

NFA Compliance Rule 2-4 — the duty of high commercial honor and fair, honest dealing.

The NFA antifraud rule — prohibits cheating, deception, fraud, and false/misleading statements to customers.

Governs communications with the public and promotional material — balanced, not misleading, plus the hypothetical-performance disclaimer.

'Know Your Customer' — required customer information and risk disclosure at account opening.

Every member must diligently supervise its employees and agents in all aspects of the futures business.

The futures risk disclosure that must be furnished and acknowledged BEFORE the customer may trade.

A SEPARATE options-on-futures disclosure that must be furnished and acknowledged before trading options — futures trading alone doesn't authorize options.

Disclose risk → Receive customer info → Acknowledge → Fund → Trade. Disclosure and acknowledgment come BEFORE the first trade.

Requires prior written power of attorney, firm written approval, special supervision, and discretionary orders to be marked.

CFTC/exchange caps (Part 150) on the contracts a speculator may hold to prevent excessive speculation/manipulation.

Allows genuine hedgers to EXCEED speculative position limits, since their futures offset real commercial risk.

A position size at/above which a trader must report to the CFTC (the large-trader reporting system).

A prohibited fictitious trade with no real change in beneficial ownership — fakes volume or sets a price.

A prohibited trade with price/terms agreed off-market in advance instead of competitive execution.

A prohibited non-competitive trade done as a favor to help another party (e.g., create a tax loss).

Trading ahead of a known customer order for the firm's/AP's own benefit — prohibited.

Excessive trading in a customer account mainly to generate commissions — prohibited.

Prohibited conduct that distorts price away from competitive levels; cornering controls supply to dictate price.

Flatly PROHIBITED — a member may not guarantee a customer against loss or promise a specific return. No exception.

Allowed only with prior written customer authorization, prior firm approval, AND in direct proportion to the member's own contribution.

CEA §4d / CFTC Reg 1.20–1.30: customer funds kept separate, never commingled with firm funds, computed daily.

Funds set aside for customers trading on FOREIGN exchanges, held separately like segregated domestic funds.

A firm's regulatory capital after 'haircuts' and excluding non-allowable assets; must meet the CFTC minimum.

A negative customer balance must be covered from the FIRM's own capital — never from other customers' segregated funds.

Orders must be time-stamped on receipt and execution to establish a clear audit trail (CFTC Part 1).

A block order for multiple accounts that must be allocated by a fair, pre-determined, non-preferential method.

Communications with the public — must be balanced, not misleading, with no loss guarantees; reviewed by a principal before use.

Required cautionary language whenever simulated/hypothetical results are shown — 'past performance is not necessarily indicative of future results.'

Promotional material is reviewed/approved by a principal before use and retained (commonly 5 years, readily accessible the first 2).

The CFTC Part 4 document a CPO/CTA must deliver and have acknowledged BEFORE accepting funds; not more than 12 months old; filed with NFA.

Required disclosure showing the first-year trading profit (% of investment) needed just to recover all fees and expenses.

Required presentation of historical performance in the prescribed Part 4 format (or a statement of no track record).

Required Disclosure-Document section covering any actual or potential conflicts of the operator/advisor and affiliates.

Required disclosure of the principals' trading/business experience (generally the past 5 years).

Fees, Business background, Past performance, Risk factors, Break-even point, Conflicts of interest.

Delivered Before funds, Acknowledged by the prospect, and no more than 12 months old (updated annually, filed with NFA).

Periodic statements (monthly for larger pools, at least quarterly otherwise) a CPO must provide participants.

An audited annual report a CPO must deliver to participants and file with the NFA after fiscal year-end.

A CTA advising 15 or fewer clients in 12 months AND not holding itself out to the public is exempt from registration (Reg 4.14).

A forum to resolve disputes between customers and members and among members. A member can't force a customer in without consent.

Disputes between members (and members and associates) arising from futures business are MANDATORY at NFA arbitration.

Final and binding with very limited grounds for appeal; meant to be quicker and cheaper than litigation.

A claim must generally be filed within 2 years of when the dispute/cause of action arose.

A CFTC-run claims procedure where a customer can recover damages from a registrant for CEA/CFTC-rule violations.

Reparations (CFTC), Arbitration (NFA), or Court — the customer chooses one; the member can't force the choice.

The NFA body that decides whether to issue a formal complaint in a disciplinary matter.

A non-disciplinary caution the NFA may issue for a minor violation — NOT a sanction or formal action.

The written charge that initiates an NFA disciplinary proceeding after the Business Conduct Committee acts.

Investigation → Business Conduct Committee → Warning/Complaint → Hearing → Decision/sanctions → Appeal (Appeals Committee → CFTC → court).

Penalties such as censure, fines, suspension, or bar/expulsion (least → most severe).

The NFA body that hears appeals of disciplinary decisions; further review goes to the CFTC, then the courts.

Reparations = CFTC (federal, vs. a registrant for rule violations); arbitration = NFA (private dispute forum). Don't swap them.

FCM, IB, CPO, CTA, AP, Floor Broker, and Floor Trader.

Required for individuals (APs, floor brokers/traders, principals) for a background/criminal check with the application.

CFTC (federal) → NFA (SRO) → exchanges (DCMs) → members/registrants. Apply through the NFA, register with the CFTC.

The NFA owns the National Commodity Futures Examination; FINRA administers it; the CFTC regulates the industry.

Must score at least 70% on EACH part (Market Knowledge and Regulations) independently — not an average.

120 scored questions (true/false + multiple choice), 2 hours 30 minutes, two separately scored parts, no prerequisites.

Required to register as an AP, IB, CTA, or CPO, and for floor brokers/traders — anyone soliciting or supervising public futures business.

Once passed, you generally have 2 years from the pass date to register with the CFTC/NFA before the result lapses.

30 days after the 1st and 2nd failure; 180 days after the 3rd and each later failure. No limit on attempts.