# Futures as a dealer hedge

**FUT-03 · Equity Index Futures · Core**

**Lesson question:** What part of an option book can futures offset?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

**Prerequisites:** FUT-01

Futures can efficiently offset broad directional sensitivity in index-related option books. The connection is Delta, not an assumption that every customer option trade forces a futures transaction.

Offsetting trades, other options and deliberate residual risk can all change the need to hedge.

## Understand the mechanism

Express the book in dollars per index point and divide by the chosen futures point value with the opposite sign. If the product is only a proxy, adjust for its economic relationship rather than assuming identical points.

Net all included positions and compare the target with existing hedges. Only their difference represents a potential new order.

## Walk through the process

Write exposure units, inventory source and timestamp. Identify the actual futures contract. Explain which risks remain, including Gamma, Vega and basis.

Public open interest is not an observed signed dealer book. Model-dependent inputs must remain labeled as such even when the arithmetic is exact.

## Operational boundary

All prices, portfolio values and account balances are fictional. Real contract calendars, broker requirements and available liquidity must be checked for the instrument actually traded. The example's mathematical hedge or payoff is not an execution guarantee.

## A worked example

Option Delta is hypothetically +2,500 dollars per point. At 50 dollars per future point, target hedge is −50 contracts. The desk already holds −40, so it sells ten more.

Later the book changes to +1,500; target becomes −30. Moving from −50 to −30 means buying twenty. The graph separates target from incremental changes.

## Graph: Futures as a dealer hedge—worked comparison

**Horizontal:** Option-book Delta (USD/point)  
**Vertical:** Target signed futures contracts

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/equity-futures/FUT-03.js` and displayed as an accessible table in the HTML lesson.

## What would invalidate the reading?

Treating the entire target as new flow double-counts an existing hedge. Mixing share equivalents with index dollars per point can be worse.

## Check your understanding

### What is the adjustment from current −40 to target −50?

**Answer:** Sell ten.

**Why:** Target minus current is −10.

### What is the critical failure to avoid?

**Answer:** Treating the entire target as new flow double-counts an existing hedge. Mixing share equivalents with index dollars per point can be worse.

**Why:** Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome. **Critical risk check.**

## Takeaway

Return to the question: What part of an option book can futures offset? State the observed facts, the assumptions and the failure condition separately.

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [CME Introduction to Futures](https://www.cmegroup.com/education/courses/introduction-to-futures)

- [CME Micro E-mini overview](https://www.cmegroup.com/education/courses/micro-e-mini-futures/micro-e-mini-futures-products-overview)