Variable Price Limit

Futures contracts are like that old broken-down car you used to put-put around in during high school: it will only go so far on a given trip. If your car traveled more than 20 miles in one go, the engine would sputter out and you'd have to push it into the nearest parking lot.

For a futures contract, there are price limits imposed by the exchange. The price can only move so far on a single day. If it reaches its limit, trading halts come into effect and prices aren't allowed to move further until the next day. Imposing limits keeps volatility under control; prices can only move so far, so fast. However, it also complicates the basic function of a market: to discover the appropriate price for something.

The variable price limit helps make that price discovery aspect go more smoothly. A futures contract reaches its price limit on a day. The next day, the price limit gets changed to the variable price limit. It provides a wider trading band for the contract, allowing it to move further than it did on the previous day.

So...say a futures contract has a price limit of $2 and a variable price limit of $4. On Monday, the contract rises from $10 to $12, triggering the price limit. On Tuesday, the limit widens to the variable amount...$4. Now the contract can rise to $16 or fall to $8 before the limit gets reached.