Futures contracts are like that old broken-down car you used to put-put around in during high school: it will only go so far on a given trip. If your car traveled more than 20 miles in one go, the engine would sputter out and you'd have to push it into the nearest parking lot.
For a futures contract, there are price limits imposed by the exchange. The price can only move so far on a single day. If it reaches its limit, trading halts come into effect and prices aren't allowed to move further until the next day. Imposing limits keeps volatility under control; prices can only move so far, so fast. However, it also complicates the basic function of a market: to discover the appropriate price for something.
The variable price limit helps make that price discovery aspect go more smoothly. A futures contract reaches its price limit on a day. The next day, the price limit gets changed to the variable price limit. It provides a wider trading band for the contract, allowing it to move further than it did on the previous day.
So...say a futures contract has a price limit of $2 and a variable price limit of $4. On Monday, the contract rises from $10 to $12, triggering the price limit. On Tuesday, the limit widens to the variable amount...$4. Now the contract can rise to $16 or fall to $8 before the limit gets reached.
Related or Semi-related Video
Finance: What are Limit Order, Sell Limi...7 Views
Finance a la shmoop what is a limit order? you want to sell a thousand shares
of Colonel electric it was demoted after they cut their dividend the shares have [Scissors cuts dividend in half]
been trading wildly between $15 and $25 a share you don't want to feel like a
moron for having sold them at fifteen bucks when six weeks later they kissed
25 with tongue so what do you do well you put in a limit order that is you put
a limit of a minimum price of 25 bucks a share for Colonel Electric such that [Pile of stocks appear]
those shares will simply sit in your account unsold maybe forever until
somebody out in the wild blue yonder of Stockland is willing to pay twenty five [Woman standing at a colonel electric stand]
dollars or more for the shares where you have a minimum price limit of 25 bucks a
share in your order so here's to hoping they sell and don't get further demoted [Man carries stock into car]
Sargent Electric is just a place you don't want to go
Up Next
What is an All or None Limit Order? An all or none limit order says the investor wants their order filled entirely or not at all. An investor may r...