A trader runs an ASX momentum system with a 28% annual return over three years. Impressed, they add a protective put hedge on every position — spending 2.1% of portfolio value monthly in premiums. End of year: gross return is 28%, net return is 2.8%. The insurance cost more than the risk it covered. This happens constantly.

Insurance trades — puts, collars, inverse ETFs, or volatility instruments — are not free protection. Every hedge has a carry cost. A put option priced at 1.5% of position value, renewed monthly, runs 18% annually. That means the underlying must outperform by 18% just to break even on the hedged position. Most retail traders never do that arithmetic before entry.

CONCEPTAn insurance trade transfers risk — it does not eliminate cost. Premium paid is return permanently surrendered.
WARNINGHedging every position regardless of context is not risk management — it is guaranteed return destruction.
KEY IDEAThe correct question is never "should I hedge?" — it is "what is the breakeven cost of this specific hedge?"

The mathematics of hedge breakeven are non-negotiable. If a position is sized at $10,000 and a monthly put costs $150, the annual drag is $1,800 — 18R on a 1R position. A rules-based framework forces three questions before any insurance trade: What is the annualised premium cost? What drawdown scenario does this actually protect against? Is that scenario probable enough to justify the carry?

Annual Return: Hedged vs UnhedgedLow VolMed VolHigh Vol+22%+4%+18%+1%+14%-3%UnhedgedHedged

Selective hedging beats blanket hedging. Traders who hedge only when implied volatility is historically cheap — typically below the 30th percentile of its 12-month range — pay materially less premium for equivalent protection. Position sizing is the first line of defence; options are a second-tier tool. For foundational reading, the mechanics of protective put strategies cover breakeven calculations precisely, while hedging in finance contextualises cost versus benefit across instrument types. Collar structures, explained at Investopedia's collar strategy page, reduce net premium by selling upside — a direct cost-reduction mechanism worth modelling before any hedge decision.

Insurance trades are not inherently good or bad — they are either priced correctly relative to the risk transferred, or they are not. Run the numbers first.

This content is for educational purposes only and does not constitute financial product advice. Past performance is not indicative of future results. Profit Logic Ltd (ACN 688 669 936) accepts no responsibility for errors or omissions in this content or anywhere on this website. Always seek advice from a licensed financial adviser before making investment decisions.