Hermēs Documentation
Delta-Neutral Hedging · Execution Damping
A beta-adjusted hedge-sizing formula to minimize transient exposure while scaling into a large NQ position
What this chapter solves
You want to go long 500 contracts of NQ (Nasdaq futures), but you can't fill that in a single order. While you scale in, a sudden drop can hand you a large unrealized loss before your full position is even built — that's not a bad strategy, it's the execution-process risk itself.
This chapter gives you a deterministic formula (from exchange official documentation): build an offsetting position in a correlated instrument (ES / QQQ / RTY) so you stay roughly Delta-neutral while entering or exiting, crushing the transient P&L swing.
This is an execution-layer tool, not a directional strategy. It doesn't predict up or down — it just makes "moving a large position" smoother. It's the same underlying idea as the dealer hedging in Options & the Market Maker: neutralize Delta risk with a correlated instrument.
The core formula
- NQ 点值：E-mini NQ = $20 / 点；Micro = $2 / 点
- 对冲品种点值：ES = $50；RTY = $50；QQQ 每 $1 = $100
- β（Beta）：两市场相对波动率系数
| Symbol | Meaning |
|---|---|
| H | Hedge size = number of hedge contracts needed in the other instrument to offset the NQ position's Delta risk |
| NQ contracts | The number of E-mini NQ contracts you trade |
| NQ point value | USD value of a 1-point NQ move (E-mini = $20, Micro = $2) |
| Hedge point value | USD value of a 1-point move in the hedge instrument (ES = $50, RTY = $50, QQQ per $1 = $100) |
| β (Beta) | Relative-volatility coefficient between the two markets, correcting the fact that NQ and the hedge instrument don't move the same amount |
The essence: convert the NQ position into a dollar Delta (contracts × point value), correct the volatility difference with β, then divide by the hedge instrument's point value to get how many hedge contracts you need.
A full worked example
The β below is illustrative. In practice β drifts with the market — you must re-estimate it from the current realized relative volatility. Don't copy the number.
Assume:
- You want to go long 100 E-mini NQ
- You hedge with ES
- Estimated NQ-vs-ES β ≈ 1.20 (NQ usually moves more than ES)
Convert NQ to dollar Delta
100 × $20/pt × 1.20 (β) = $2,400 / pt equivalent exposure
Divide by the hedge point value
$2,400 ÷ $50 (ES point value) = 48 ES contracts
Execute
While going long NQ, short ~48 ES. Until your 100 NQ is fully built, the combined book is near Delta-neutral, so market chop barely moves your P&L.
Unwind the hedge
Once the NQ long is fully scaled in and you want the directional exposure, buy back the ES short in steps, letting the real NQ long bias come through.
Hedging with QQQ: QQQ is an ETF where "$1 move = $100". Just swap the denominator for QQQ's dollar sensitivity. Same principle: convert NQ's dollar Delta into hedge-instrument units.
When to use it
Scaling into size
A position too large to fill at once; entry takes minutes or longer
Scaling out of size
Exits carry directional exposure too — hedge to protect the unwind
Cross-product spread
Expressing 'NQ stronger than ES' is itself a Delta-neutral structure
Pre-event de-risking
Keep the position but cut directional risk before a major print
Invalidation & limits (must read)
The formula is deterministic arithmetic, but it rests on a drifting assumption — that β and correlation are stable. These conditions break the hedge:
1. Beta drift / correlation breakdown
β is not constant. In panic selloffs, sector rotation, or a tech-only blowup, the NQ-vs-ES relative volatility shifts suddenly, and a hedge sized on the old β is under- or over-hedged.
→ Fix: re-estimate β on a rolling window; shorten the window in violent regimes.
2. This is NOT "risk-free"
Delta-neutral only neutralizes first-order directional risk. It does not remove:
- Spread risk (NQ and ES diverge, the spread widens)
- Execution / slippage risk (the two legs can't fill the same instant)
- Overnight gaps (the two products may gap by different amounts)
3. It adds a cost layer
The hedge leg has its own commissions, spread, and margin. Only use it when the exposure risk is actually worth hedging — small, fast in-and-out trades don't need it.
4. Don't forget to remove the hedge
The hedge is a temporary structure serving the entry process. If you finish building and forget to lift the hedge leg, it cancels your directional thesis. Write "unwind the hedge" into your trade plan.
Relationship to dealer hedging
After this chapter you should feel it: what you just did is what option market makers do every second.
- A dealer sells a call → instantly exposed to Delta risk → immediately hedges in the futures market (see Options & the Market Maker)
- You go long NQ → want to temporarily shield directional risk → hedge with ES
The only difference: the dealer is mechanically forced to hedge, while you actively choose to use it for smoother execution. Internalize this and the 30–60% "hedging flow" inside the ES order book becomes far more tangible.
Chapter summary
Hedge size = (NQ contracts × NQ point value × β) ÷ hedge point value
Convert NQ's dollar Delta, correct with β, translate into hedge-instrument units.
It's an execution damper, not a directional play
It only keeps the process of moving a large position near Delta-neutral.
β drifts, correlation breaks
Re-estimate β on a rolling window; never trust a stale value in violent regimes.
Remember to unwind
Otherwise the hedge leg cancels your directional thesis.