What Is a 'Position Limit'

A position limit is a preset level of ownership, or control, of derivative contracts – like options or futures – that a trader, or affiliated group of traders, may not exceed.

BREAKING DOWN 'Position Limit'

Position limits are established by the U.S. Commodity Futures Trading Commission (CFTC) to ensure that no single trader, or group of traders, can exert outsized control on any one financial asset using derivatives.

Purpose of Position Limits

Position limits are ownership restrictions that most individual traders are never going to need to worry about breaching. Most position limits are simply set too high for an individual trader to reach. However, individual traders should be grateful these limits are in place because they provide a level of stability in the financial markets by preventing large traders, or groups of traders, from manipulating market prices using derivatives.

For instance, by buying call options or futures contracts, large investors, or funds, can build controlling positions in certain stocks or commodities without having to buy actual assets themselves. If these positions are large enough, the exercise of them can change the balance of power in corporate voting blocks or commodities markets, creating increased volatility in those markets.

How Position Limits are Determined

Position limits are determined on a net equivalent basis by contract. This means that a trader who owns one options contract that controls 100 futures contracts is viewed the same as a trader who owns 100 individual futures contracts. It's all about measuring the control a trader can exert over a market.

Position limits are applied on an intraday basis. While some financial rules apply to the number of holdings, or exposure, a trader has at the end of the trading day, position limits are applicable throughout the trading day. If at any time during the trading day, a trader surpasses the position limit, she will be in violation of the limit.

Traders may receive an exemption from an imposed position limit from the CFTC in some instances.

RELATED TERMS
  1. Limit Up

    Limit up is the maximum amount by which the price of a commodity ...
  2. Daily Trading Limit

    A daily trading limit is the maximum gain or loss on a derivative ...
  3. Position Trader

    A position trader is a style of trader who holds a position for ...
  4. Trader

    A trader is an individual who engages in the transfer of financial ...
  5. Forex Options Trading

    Forex options trading allows currency traders to realize gains ...
  6. Head Trader

    A head trader is the manager of a trading business, responsible ...
Related Articles
  1. Trading

    10 Traits of a Successful Options Trader

    This article will help you understand the 10 characteristics of how to become a successful options trader and develop a successful options strategy.
  2. Trading

    What Can Traders Learn From Investors?

    Discover tips from a long-term strategy that can help you make better short-term trades.
  3. Investing

    The Roles of Traders and Investors

    Discover how these two groups work together to keep the market functioning properly.
  4. Trading

    What Type Of Forex Trader Are You?

    Timing may be the key to uncovering your true strength as a forex trader.
  5. Trading

    Day Trading: An Introduction

    This article takes an objective look at day trading, who does it, and how it is done.
  6. Trading

    Average Rate of Return for Day Traders

    Is it possible to determine the average rate of return for day traders, and what does it take to get started?
  7. Trading

    How much trading capital do forex traders need?

    Forex traders can see substantial benefits from capital gains in the form of a small pip profit over time.
RELATED FAQS
  1. What is the difference between extensive margin and intensive margin in economics?

    Find out why it is important for traders to understand the difference between initial margin requirements and maintenance ... Read Answer >>
  2. What does a futures contract cost?

    Learn about values of futures contracts and the initial margin a trader must place in an account to open a futures position, ... Read Answer >>
  3. What Does It Mean to Be Long or Short a Derivative?

    Find out more about derivative securities and what it indicates when traders or investors establish a long or short position ... Read Answer >>
  4. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. Learn how futures contracts can be used to limit ... Read Answer >>
  5. How do I set a strike price for a future?

    Find out why futures contracts don't have set strike prices like options or other derivatives, even though price change limits ... Read Answer >>
Hot Definitions
  1. Risk Tolerance

    Risk tolerance is the degree of variability in investment returns that an individual is willing to withstand.
  2. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center