Exchanges establish daily price limits for trading 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 increased by its daily limit, there can be no trading 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 previous 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 allowed to increase or decrease by the limit amount each day.
For some contracts, daily price limits are eliminated during the month in which the contract expires. Because prices can become particularly 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 increased or decreased. Because of daily price limits, there may be occasions when it is not possible to liquidate an existing futures position at will. In this event, possible alternative strategies should be discussed with a broker.
Reprinted with permission from the National Futures Association. Copyright 2002.