Derivatives Market Overview
August 2026
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Funding Markets
U.S. equity funding term structure steepened with short-dated levels decreasing and the long end increasing. There is a noticeable local peak around year-end that has persisted month-over-month, highlighting the increased cost of financing around year-end. Equity financing levels continue to trade rich to their two-year medians. Fixed income financing decreased month-over-month and remains close to its two-year medians.
Cash-and-carry strategies seek to earn a positive financing spread after adjusting for carrying costs. The strategy buys a near-dated futures contract (e.g., September 2026) with the intent of taking delivery of the physical asset and sells a far-dated futures contract. The financing levels in the table account for the storage costs associated with taking physical delivery of gold.
Volatility Markets
Thirty-day implied volatilities in U.S. equity markets decreased in August as all three major indices rallied: SPX +2.62%, RTY +0.86%, NDX +4.18%. The Russell 2000 (RTY) 30-day ATM implied volatility, in particular, marked a two-year low in August and ended the month in the 1st percentile on a two-year lookback. Notably, the RTY versus the SPX 30-day ATM implied volatility spread closed the month at 4.67 (RTY implied volatility trades at a premium to SPX), which is in the 7th percentile over the past two years, showing that RTY implied volatility is low in absolute terms and relative to the SPX. The average spread for this pair over the same period is 7 volatility points. This compressed spread suggests the options market is pricing relatively less incremental risk for small caps versus large caps.
Gold delivered a strong return in August, gaining nearly 10% month-over-month, its best monthly performance since January. The rally was accompanied by a shift in the options market: upside volatility increased, and volatility skew flattened, driven by increased demand for call options. Average daily traded call option volume increased nearly 230% month-over-month, while put option volume only increased by 38%. The 90%/110% skew inverted and went negative, meaning the 110% call volatility exceeded the 90% put volatility, a phenomenon last seen in March when gold was trading near all-time highs.
What Stands Out
Rising Treasury yields have been top of mind for many investors recently, not to mention Scott Bessent, with higher yields having significant implications across markets. Within Treasury futures markets, a key impact of higher yields has been an increased likelihood of changes to the cheapest-to-deliver (CTD) bond, particularly for long-duration contracts.
Unlike equity index futures, which are cash settled at expiry, Treasury futures require the short side of the contract to physically deliver an eligible bond from a defined deliverable basket. As yields fluctuate, the CTD bond can change, a feature known as the “switch option.” Due to the mechanics of Treasury futures contracts, higher yields can result in longer-duration bonds becoming the CTD, significantly impacting the duration and return profile of the instruments. As depicted in the graphs below, the switch option is negatively convex for the long holder: the futures contract becomes longer in duration as yields rise, a double whammy on the futures price. The switch-option dynamics embedded in futures contracts have material implications for investors using Treasury futures for hedging purposes, particularly if further increases in rates occur.
[1] Please refer to the glossary for more information.
Data as of August 31, 2026. Sources: Bloomberg Index Services Ltd., Bloomberg, iVolatility, dealer indications, NISA calculations.
Glossary
What is the MOVE Index? The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps. The index tracks implied normal yield volatility of a yield curve weighted basket of at-the-money one-month options on the 2Y, 5Y, 10Y and 30Y constant maturity interest rate swaps. The index value is equal to the average of the implied normal yield volatility of the four options, where the 10Y option is given a 40% weight and the other components each hold a 20% weight.
What is the VIX Index? The VIX Index is a calculation designed to produce a measure of constant 30-day expected volatility of the U.S. stock market derived from mid-quote prices of the S&P500 Index call and put options.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data are as of the dates noted.
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