What is a Variable Price Limit
A variable price limit allows a futures contract to move a larger amount in a single day once a fixed limit price has been reached. Futures contracts have fixed limits they can move in a day. Trading stops at these limits, and doesn't resume that day unless the price moves back inside the limit price. A variable price limit allows a futures exchange to expand the price limit after the limit has been reached.
Breaking Down Variable Price Limit
Variable price limits allow contracts to trade past their initial price limit, once the expanded or variable price limit takes effect. There are two parts here, the initial price limit and the variable price limit. The initial price limit is in place to prevent excessive single-day volatility. It limits how much a futures contract can rise or fall in a single day. The limit does not halt trading for the day, rather it restricts transactions to above the daily low limit or below the daily high limit. Transactions don't occur outside the limits.
If the day where the initial limit is reached settles at the limit price then the variable price limit may be implemented the next trading day. If a futures contract has a variable price limit, then the next day the initial limit amount will be expanded to the variable amount, allowing more traders to enter and exit trades and for the market to more quickly move to its fair value with less restriction.
Not all futures contracts have variable price limits.
Variable Price Limit Example
Corn futures may have an initial price limit of $0.25 per bushel (subject to change). If prices move by $0.25 per bushel in a day, from the previous close, then trades outside that $0.25 mark are restricted. The limit is added to and subtracted from the previous close to give an upper and lower limit. Trades can still occur under the upper limit or above the lower limit, but not beyond. If the day closes at the limit price, then the next day a variable price limit is used. This may allow for $0.40 per bushel of movement. Once the price is no longer settling at the variable price limit, then the initial price limit is reinstituted.
Price Limits Are Subject to Change
Initial price limits and variable price limits are subject to change.
Each exchange sets price limits and variable price limits. Some exchanges alter these on a regular basis as the price of a contract moves higher or lower overall. How each exchange handles variable price limits may differ. Before trading a futures contract, be aware of both these limits by checking that contract's specifications page on the exchange you are trading.