What defines a position limit?

A position limit is defined as the maximum number of contracts that an individual or entity is allowed to hold in a specific futures or options market. This regulation is in place to promote market fairness and liquidity, preventing any single participant from having too much influence over the market. By imposing these limits, exchanges can help mitigate the risks of market manipulation and ensure a more level playing field for all traders.

Position limits are essential for maintaining orderly markets, as they encourage diversification among participants and can help prevent excessive speculation. Understanding position limits is critical for traders to ensure they comply with regulatory requirements while effectively managing their risk exposure.