Margins, Premiums, Limits, Settlement and Delivery
Initial and maintenance margin, variation settlement, premium components and delta, price limits, offset, delivery notices, warehouse receipts, exchange for physical, exercise, assignment, and final dates.
How to study for the Series 3 exam
Build Part 1 from contract mechanics to hedging and option calculations, then study Part 2 as a workflow: identify the regulated role, customer or account, required disclosure or control, and correct compliance response.
Core concepts
Concept 1
Futures margin is a performance bond; daily gains and losses flow through variation settlement and can create calls before a position is closed.
Exam cue: Compute account equity after each price move before deciding whether a maintenance call exists.
Concept 2
Option premium equals intrinsic value plus time value, while delta estimates how much premium may change for a one-unit move in the underlying.
Exam cue: For an option, determine moneyness first, then intrinsic value, time value, and breakeven.
Concept 3
Price limits can restrict execution without capping economic loss, and delivery or exercise deadlines must be managed before the applicable final date.
Exam cue: When a contract approaches first notice or final trading day, identify whether offset, delivery, exercise, or assignment remains possible.
Risk pitfalls and guardrails
Using initial margin rather than contract size and price movement to calculate profit or loss.
Guardrail: Keep cash, futures, and option legs separate; do not confuse margin with exposure, disclosure with permission, or exam passage with registration.
Assuming a lock-limit market guarantees an order can be executed at the limit price.
Guardrail: Keep cash, futures, and option legs separate; do not confuse margin with exposure, disclosure with permission, or exam passage with registration.
Treating an option holder's right as the writer's right or overlooking post-exercise futures margin.
Guardrail: Keep cash, futures, and option legs separate; do not confuse margin with exposure, disclosure with permission, or exam passage with registration.
Memory anchors
Initial Margin
Initial margin is the performance bond required to open a futures position; it is not the contract's purchase price.
Maintenance Margin
If equity falls below maintenance, the account is generally called back to the initial requirement.
Mark to Market
Open futures positions are settled to the market daily, crediting gains and debiting losses.
Intrinsic Value
A call's intrinsic value is underlying minus strike when positive; a put's is strike minus underlying when positive.
Time Value
Time value is option premium minus intrinsic value and cannot be negative.
Delta
Delta estimates the option premium's change for a one-unit move in the underlying, all else equal.
Lock Limit
At a lock limit, bids or offers may exist on only one side, so liquidation may be impossible.
First Notice Day
A long delivery-month futures position may become subject to delivery notice beginning on first notice day.
EFP
An exchange for physical pairs an opposite futures transaction with a related cash-market transfer.
Assignment
The clearing process assigns an exercised option obligation to a writer according to applicable procedures.
Checkpoint rule
Do the check-up only after you can summarize each concept in one sentence and identify one dangerous pitfall from memory.
Knowledge Check (after reading)
Short check-up to confirm understanding of this module.
Check-up Questions
Futures initial margin is best described as
An account falls below maintenance margin. It is generally called up to
Answer all questions to submit.
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Move forward only after this module is stable.
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