FINRA Series 3 Free Practice Questions 38

Straddle vs. spread
A long straddle or strangle will profit from extreme price volatility in either direction. The expectation is that the price differential will offset the premium paid to establish the position. A short straddle or strangle will profit from little or no volatility, and traders seek to profit from the premium received.

Long straddle
A trader who establishes a long straddle position expects an increase in the price volatility of the underlying commodity. The trader seeks to profit either from large upswings or downswings that are dramatic enough to offset the cost of premiums.

Short straddle
A trader who establishes a short straddle position expects little if any price volatility, which means short positions will not reach in the money status and be subject to exercise. The trader seeks to profit from the premium received.

Strangle vs. straddle
A strangle operates in exactly the same way as a straddle with the exception of the strike prices of the puts and calls. In a straddle, the prices are the same for both, as the trader is indifferent to the direction of volatility. However, a strangle uses different strike prices that reflect the expectation of the trader. That is, the trader assumes a higher probability of extreme volatility for one leg of the position than for the other.

Strangle vs. straddle
A strangle operates in exactly the same way as a straddle with the exception of the strike prices of the puts and calls. In a straddle, the prices are the same for both, as the trader is indifferent to the direction of volatility. However, a strangle uses different strike prices that reflect the expectation of the trader. That is, the trader assumes a higher probability of extreme volatility for one leg of the position than for the other.

Long strangle
The trade set-up for a long strangle is the same as the one for a long straddle with the exception of the strike prices.

Short strangle
The trade set-up for a short strangle is the same as the one for a short straddle with the exception of the strike prices.

NFA – Regulatory functions
The Commodities Exchange Act (CEA) of 1936 was created to regulate the actions of commodities traders engaged in trading futures contracts, options on futures contracts, options on physical commodities, security futures products, and some retail foreign exchange contracts. The act is administered by the Commodity Futures Trading Commission (CFTC). Section 17 of the CEA provides for the registration of industry self-regulating organizations with the CFTC, which play in role in regulating the actions of their members. The National Futures Association (NFA) is the only such organization currently registered, and acts on behalf of the CFTC.

NFA – Regulatory functions
The Commodities Exchange Act (CEA) of 1936 was created to regulate the actions of commodities traders engaged in trading futures contracts, options on futures contracts, options on physical commodities, security futures products, and some retail foreign exchange contracts. The act is administered by the Commodity Futures Trading Commission (CFTC). Section 17 of the CEA provides for the registration of industry self-regulating organizations with the CFTC, which play in role in regulating the actions of their members. The National Futures Association (NFA) is the only such organization currently registered, and acts on behalf of the CFTC.

The NFA is responsible for the following regulatory functions:
• auditing and surveillance of NFA members for the purpose of enforcing and ensuring compliance with NFA financial requirements
• establishment and enforcement of rules and standards to ensure customer protection
• administration and maintenance of an arbitration process to adjudicate disputes arising from futures and foreign exchange transactions
• determination of fitness of applicants for membership and review of continuing membership for existing members