658 Part V: Index Options and Futures 
tracts in order to help ensure that the market cannot be manipulated by someone 
forcing the price to move tremendously in one direction or the other. Another rea­
son for having trading limits is ostensibly to allow only a fixed move, approximately 
equal to or slightly less than the amount covered by the initial margin requirement, 
so that maintenance margin can be collected if need be. However, limits have been 
applied to all futures, some of which don't really seem to warrant a limit - U.S. 
Treasury bonds, for example. The bond issue is too large to manipulate, and there is 
a liquid "cash" bond market to hedge with. 
Regardless, limits are a fact of life in futures trading. Each individual commod­
ity has its own limits, and those limits may change depending on how the exchange 
views the volatility of that commodity. For example, when gold was trading wildly at 
a price of more than $700 per ounce, gold futures had a larger daily trading limit than 
they do at more stable levels of $300 to $400 an ounce (the current limit is a $15 
move per day). If a commodity reaches its limit repeatedly for two or three days in a 
row, the exchange will usually increase the limit to allow for more price movement. 
The Chicago Board of Trade automatically increases limits by 50% if a futures con­
tract trades at the limit three days in a row. 
Whenever limits exist there is always the possibility that they can totally destroy 
the liquidity of a market. The actual commodity underlying the futures contract is 
called the "spot" and trades at the "spot price." The spot trades without a limit, of 
course. Thus, it is possible that the spot commodity can increase in price tremen­
dously while the futures contract can only advance the daily limit each day. This sce­
nario means that the futures could trade "up or down the limit" for a number of days 
in a row. As a consequence, no one would want to sell the futures if they were trad­
ing up the limit, since the spot was much higher. In those cases there is no trading in 
the futures - they are merely quoted as bid up the limit and no trades take place. This 
is disastrous for short sellers. They may be wiped out without ever naving the chance 
to close out their positions. This sometimes happens to orange juice futures when an 
unexpected severe freeze hits Florida. Options can help alleviate the illiquidity 
caused by limit moves. That topic is covered later in this chapter. 
DELIVERY 
Futures on physical commodities can be assigned, much like stock options can be 
assigned. When a futures contract is assigned, the buyer of the contract is called upon 
to receive the full contract. Delivery is at the seller's option, meaning that the owner 
of the contract is informed that he must take delivery. Thus, if a corn contract is 
assigned, one is forced to receive 5,000 bushels of corn. The old adage about this 
being dumped in your yard is untrue. One merely receives a warehouse receipt and