What defines the breakeven point when hedging with puts?

The breakeven point when hedging with puts is defined by the cost of the underlying investment plus the premium paid for the put option. This is because when an investor buys a put option as a hedge, they are essentially protecting themselves against a decline in the price of the underlying asset.

To determine the breakeven point, first consider the total outlay involved: this includes the initial investment in the underlying asset and the cost of the put option premium. If the price of the asset falls, the put option will gain value, providing a payoff that offsets the loss in the asset's value. Therefore, calculating the breakeven involves understanding that you need to look at both the asset's cost and the premium paid to understand when the total investment costs are recovered.

This approach ensures that any downturn in the asset's price can be balanced out by the gain from the put option, ultimately protecting the investor's position.