We analyze Ge hut island formation on Si(001), using first-principles calculations of energies, stresses, and their strain dependence of Ge/Si(105) and Ge/Si(001) surfaces combined with continuum modeling. We give a quantitative assessment on strain stabilization of Ge(105) facets, estimate the critical size for hut nucleation or formation, and evaluate the magnitude of surface stress discontinuity at the island's edge and its effect on island stability.