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. Commodity Trader

    A commodity trader is an individual or business entity that focuses ...
  2. Variable Price Limit

    A variable price limit allows a futures exchange to alter the ...
  3. Desk Trader

    A desk trader is a financial trader who is restricted to instituting ...
  4. Position Trader

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

    Day traders execute short and long trades to capitalize on intraday ...
  6. Buy Limit Order

    A buy limit order is an order to purchase a security at or below ...
Related Articles
  1. Personal Finance

    A Day in the Life of a Day Trader

    Day trading has many advantages, and while we often hear about these perks, it's important to realize that day trading is hard work.
  2. Investing

    The Roles of Traders and Investors

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

    An Introduction To Trading Forex Futures

    We explain what forex futures are, where they are traded, and the tools you need to successfully trade these derivatives.
  4. Trading

    Are You a Trend Trader or a Swing Trader?

    Swing traders and trend traders execute market timing strategies that require different skill sets.
  5. 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.
  6. Trading

    The 10 Worst Mistakes Beginner Traders Make

    Traders generally buy and sell securities more frequently and hold positions for much shorter periods than investors, which can result in costly mistakes.
  7. Trading

    Introduction to Stock Trader Types

    What type of stock trader are you?
RELATED FAQS
  1. When is a buy limit order executed?

    A buy limit order is only executed when the asking price is at or below the limit price specified in the order. Read Answer >>
  2. 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 >>
  3. What is the difference between derivatives and options?

    A derivative is a financial contract that gets its value from an underlying asset. Options offer one type of common derivative. Read Answer >>
Trading Center