Futures 101 - Chapter 18: Daily Price Limits

Introduction to Futures Trading 101
Published By: National Futures Association

Exchanges establish daily price limits for trad-ing in futures contracts. The limits are stated in terms of the previous day’s closing price plus or minus so many cents or dollars per trading unit. Once a futures price has in-creased by its daily limit, there can be no trad-ing at any higher price until the next day of trading. Conversely, once a futures price has declined by its daily limit, there can be no trading at any lower price until the next day of trading. Thus, if the daily limit for a particu-lar grain is currently 20¢ a bushel and the pre-vious day’s settlement was $3, there can not be trading during the current day at any price below $2.80 or above $3.20. The price is al-lowed to increase or decrease by the limit amount each day.

For some contracts, daily price limits are elimi-nated during the month in which the contract expires. Because prices can become particu-larly volatile during the expiration month (also called the "delivery" or "spot" month), persons lacking experience in futures trading may wish to liquidate their positions prior to that time. Or, at the very least, trade cautiously and with an understanding of the risks that may be involved.

Daily price limits set by the exchanges are subject to change. They can be either in-creased or decreased. Because of daily price limits, there may be occasions when it is not possible to liquidate an existing futures posi-tion at will. In this event, possible alternative strategies should be discussed with a broker.