it depends on the boat... on a speedboat where the transom and bottom meet at a sharp angle, and the bottom of the boat at the transom is always in contact with the water when underway, the cav plate only needs to be level with the bottom of the boat....
a sailboat is built as a displacement vessel with a lot of rocker, so it will follow the waves easier and so, rides better over them.... this will cause the ends of the boat to rise up high as it goes over the crest of a wave, and then the ends will be nearly submerged when the boat is in the trough.....
so it depends on how your boat rides and the sea conditions...
I have a long shaft honda 10hp on my 25, mounted on a jack plate, and I usually have the prop in the water about 18", and it has came out out of the water on a wave many times, and the engine cover has also been submerged over halfway on other waves/trough.... sometimes when the conditions are rough there is no good adjustment for an outboard on the end of a sailboat....
the engine covering/cowling is designed so a wave can wash over the engine without any damage or water ingestion when the engine is running, but this can only happen for a few seconds at a time.... but when the prop comes out of the water, the engine can quickly over rev itself.... and when the prop gets back in the water it does not always catch, because it has been ventilated and it may be cavitating, so it continues to over rev until you shut it down to an idle...
to answer the specific question, the lower unit only needs to be in the water far enough to insure water will get picked up by the water pump.... the cavitation plate on an outboard really only comes into effect when making sharp turns at high speeds, so the prop doesnt suck air when the smooth flow of water is disturbed because of the high speed turn
