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Buying a house, for most of us, is the single largest purchase we’ll ever make — which is exactly why having the right amount of homeowners insurance is so important. “How much home insurance do I need?” is a common question that new homeowners ask themselves, and ultimately, the answer depends on factors like your risk tolerance, the requirements of your mortgage lender and how much you can afford to spend on premiums.

Let’s dig into the details so you can better assess the right amount of dwelling coverage and content coverage when it comes to your homeowners insurance policy.

Choosing the Right Dwelling Coverage

Homeowners insurance, broadly speaking, covers three separate categories: the home itself (or dwelling), the belongings inside your home and liability claims you may be vulnerable to if someone gets hurt on your property. We’re going to start with the first category: dwelling coverage.

Dwelling usually refers not only to your home itself, but also to attached structures, such as porches or garages. Outbuildings, or ADUs, may also be covered, but it’s important to check with your individual insurer, and to keep in mind that they may be covered at a lower rate than the primary dwelling.

Your dwelling is covered against damage that comes from specific perils, which will be named in your policy paperwork. It’s important to understand that not all damages are eligible for repair or replacement if they’re not one of the named perils in your policy.

Here are the common perils covered by most homeowners insurance policies, per the Insurance Information Institute:

•  Fire or lightning

•  Smoke

•  Windstorm or hail

•  Explosions

•  Damage caused by riots or civil commotion

•  Damage caused by vandalism or malicious mischief

•  Damage caused by aircraft, cars or other vehicles

•  Theft

•  Volcanic eruptions

•  Falling objects

•  Damage caused by the weight of snow, ice or sleet

•  Water damage from within the home

However, there are certain types of natural disasters and damages that are not covered under most standard homeowners insurance policies, some of which are important to purchase riders or endorsements for, such as:

•  Flood damage

•  Earthquake damage

•  Maintenance damage (such as damage due to mold or pests)

•  Sewer backups

Once you know which perils are covered by your policy, you can figure out how much coverage you need.

Recommended: Homeowners Insurance Coverage Options to Know

Standard Dwelling Coverage

Generally speaking, you want enough dwelling coverage to fully replace your home in the event it would need to be rebuilt. Importantly, that figure is not the same as your home’s value; the replacement cost may be higher or lower than your home’s value depending on its condition, location, and the price of building materials in your area.

This is a hard number to pin down for sure, but your insurance company or an appraiser can help you make an educated guess. Additionally, you’ll want to review this number yearly, as it can change over time as the price of local labor and materials shifts and it’s critical to assess how much dwelling coverage you need.

Buying Better Dwelling Coverage

While standard dwelling insurance should cover the full cost of replacing your home (in the event that it’s damaged by covered perils, don’t forget), there are additional levels of coverage that could be helpful under certain circumstances.

For instance, if there’s a storm or other local disaster that means many homeowners will be in need of repairs at the same time, the cost of labor and materials might skyrocket thanks to good ol’ supply and demand.

You might consider one of the following options, that are offered by some, but not all, homeowners insurers:

•  Extended replacement cost, which offers from 10% to 100% of additional, extended coverage to account for a spike in building costs.

•  Guaranteed replacement cost, which, as its name implies, guarantees that the full replacement cost of your home will be covered, regardless of price.

Of course, these additional coverages will come at an additional monthly premium cost.

Choosing the Right Contents Coverage

After your dwelling is covered, it’s time to move on to the stuff you keep inside it. Your contents coverage, or personal property coverage, is what you’ll rely on if you need to replace your belongings — from the clothes hanging in your closet to the food waiting in your fridge, and everything in between.

Sounds pretty great, right? The problem is, few of us actually have a handle on what exactly we own. In order to ensure you have enough personal property coverage, it’s a good idea to make an actual inventory of your possessions, or at least go through every room of your home and take photos of high-value items like electronics.

Certain high-value items, like jewelry, musical instruments, rare art or sports equipment, may require the purchase of additional coverages and should be kept on a separate inventory list.

Replacement Value for Better Protection

You may be offered “actual cash value” for your personal property, but if your insurer offers it, it’s a good idea to upgrade to “replacement value.” That way, you’ll be paid out for the actual cost of replacing your items, rather than for their cash value — which may be less than their actual cost to replace them thanks to inflation and other factors.

Adjusting Your Contents Coverage

Just as with your dwelling coverage, you want to ensure you’re regularly adjusting your contents coverage to ensure it’s up to date with what you actually own.

Personal property coverage is generally expressed as a percentage of your dwelling coverage — so if your home is covered for $400,000, and you have 50% in personal property coverage, you’d be paid $200,000 to replace your belongings. You can, however, adjust this figure up (or down), and you may want to do so.

Theft Limits

Also be sure to look out for “theft limits” in your policy, which may put a cap on how much certain high-value categories of items can be covered in the event of theft. For instance, jewelry may only be covered up to $1,500 in the event of theft, which is exactly why you want to document your high-value items and potentially buy extra coverage for them.

“Open Peril” Coverage for Belongings

Remember those perils we talked about above? Just like your dwelling coverage, your personal property coverage only extends to damages or losses due to those named perils. However, some insurers offer an “open peril” coverage option for belongings, which will cover replacement in any event. (Always be sure to read the fine print of your policy to make sure you know how your coverage works, however.)

Recommended: Is Homeowners Insurance Required to Buy a Home? 

Getting Better Liability Insurance

Finally, homeowners insurance also covers you in case you’re sued by someone who gets hurt on your property — for instance, someone who’s bitten by your dog or gets drunk at a party and falls on the steps. It might seem like a long shot, especially if you trust your friends, but you never know when someone might suddenly face major medical expenses… or decide to sue you.

Those kinds of costs can rack up quickly, so it may be a good idea to adjust up from the “standard” coverage of $100,000. Many personal finance experts suggest ensuring you have enough liability insurance to fully cover your assets — which is to say, the value of your home and all your other possessions, as well as the money you have in the bank.

Recommended: Personal Liability Insurance Coverage

Getting Sufficient Loss of Use Coverage

Finally, homeowners insurance can also cover the living expenses you’ll rack up while it’s in the process of being repaired or rebuilt. That process can take time — and living on restaurant meals and hotel rooms can be costly.

Generally, loss-of-use coverage comes in at about 20% of your dwelling coverage as a default, but think carefully about whether or not you might want to adjust that figure up, especially if you live in an expensive city.

The Takeaway

The exact amount of homeowners insurance you need will depend on both your personal risk tolerance and the requirements of your mortgage lender — not to mention, of course, the monthly premiums you can afford.

While your home might be your single biggest purchase, it’s not the most valuable thing in your possession. That privilege belongs to your life itself. And while you can’t put a dollar value on your life, you can help ensure the people you’d leave behind, if something happened to you, will be comfortable and taken care of in your absence.

Sound overwhelming? Don’t worry — SoFi can help! We’ve teamed up with Ladder to bring our members competitive, simple-to-understand life insurance products that will put your mind at ease. Plus, they take only minutes to set up.

Photo credit: iStock/PeopleImages

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In options trading, Delta is an important assessment tool used to measure risk sensitivity. Delta is a risk metric that compares changes in a derivative’s underlying asset price to the change in the price of the derivative itself.

Essentially it measures the sensitivity of a derivative’s price to a change in the underlying asset. Using Delta as part of an options assessment can help investors make better trades.

Delta is one of “the Greeks,” a set of options trading tools denoted by Greek letters. Some traders might refer to the Greeks as risk sensitivities, risk measures,or hedge parameters. The Delta metric is the most commonly used Greek.

Recommended: A Beginner’s Guide to Options Trading

Option Delta Formula

Analysts calculate Delta using the following formula with theoretical pricing models:

Δ = ∂V / ∂S

Where:

•   ∂ = the first derivative

•   V = the option’s price (theoretical value)

•   S = the underlying asset’s price

Some analysts may calculate Delta with the much more complex Black-Sholes model that incorporates additional factors. But traders generally don’t calculate the formula themselves, as trading software and exchanges do it automatically. Traders analyze these calculations to look for investment opportunities.

Option Delta Example

For each $1 that an underlying stock moves, an the equity derivative’s price changes by the Delta amount. Investors express the Delta sensitivity metric in basis points. For example, let’s say there is a long call option with a delta of 0.40. Investors would refer to this as “40 delta.” If the option’s underlying asset increased in price by $1.00, the option price would increase by $0.40.

However, the Delta amount is always changing, so the option price won’t always move by the same amount in relation to the underlying asset price. Various factors impact Delta, including asset volatility, asset price, and time until expiration.

If the price of the underlying asset increases, the Delta gets closer to 1.0 and a call option increases in value. Conversely, a put option becomes more valuable if the asset price goes lower than the strike price, and in this case Delta is negative.

How to Interpret Delta

Delta is a ratio that compares changes in the price of derivatives and their underlying assets. It uses theoretical price movements to track what will happen with changes in asset and option price. The direction of price movements will determine whether the ratio is positive or negative.

Bullish options strategies have a positive Delta, and bearish strategies have a negative Delta. It’s important to remember that unlike stocks, options buying and selling options does not indicate a bullish or bearish strategy. Sometimes buying a put option is a bearish strategy, and vice versa.

Recommended: Differences Between Options and Stocks

Traders use the Delta to gain an understanding of whether an option will expire in the money or not. The more an option is in the money, the further the Delta value will deviate from 0, towards either 1 or -1.

The more an option goes out of the money, the closer the Delta value gets to 0. Higher Delta means higher sensitivity. An option with a 0.9 Delta, for example, will change more if the underlying asset price changes than an option with a 0.10 Delta. If an option is at the money, the underlying asset price is the same as the strike price, so there is a 50% chance that the option will expire in the money or out of the money.

Call Options

For call options, delta is positive if the derivative’s underlying asset increases in price. Delta’s value in points ranges from 0 to 1. When a call option is at the money the Delta is near 0.50, meaning it has an equal likelihood of increasing or decreasing before the expiration date.

Put Options

For put options, if the underlying asset increases in price then delta is negative. Delta’s value in points ranges from 0 to -1. When a put option is at the money the Delta is near -0.50.

How Traders Use Delta

In addition to assessing option sensitivity, traders look to Delta as a probability that an option will end up in or out of the money. The more likely an option is to generate a profit, the less risky it is as an investment.

Every investor has their own risk tolerance, so some might be more willing to take on a risky investment if it has a greater potential reward. When considering Delta, traders recognize that the closer it is to 1 or -1 to greater exposure they have to the underlying asset.

If a long call has a Delta of 0.40, it essentially has a 40% chance of expiring in the money. So if a long call option has a strike price of $30, the owner has the right to buy the stock for $30 before the expiration date. There is a 40% chance that the stock’s price will increase to at least $30 before the option contract expires.

Traders also use Delta to put together options spread strategies.

Delta Neutral

Traders also use Delta to hedge against risk. One common options trading strategy, known as neutral Delta, is to hold several options with a collective Delta near 0.

The strategy reduces the risk of the overall portfolio of options. If the underlying asset price moves, it will have a smaller impact on the total portfolio of options than if a trader only held one or two options.

One example of this is a calendar spread strategy, in which traders use options with various expiration dates in order to get to Delta neutral.

Delta Spread

With a Delta spread strategy, traders buy and sell various options to create a portfolio that offsets so the overall Delta is near zero. With this strategy the trader hopes to make a small profit off of some of the options in the portfolio.

Using Delta Along With the other Greeks

Delta measures an option’s directional exposure. It is just one of the Greek measurement tools that traders use to assess options. There are five Greeks that work together to give traders a comprehensive understanding of an option. The Greeks are:

•   Delta (Δ): Measures the sensitivity between an option price and the price of the underlying security.

•   Gamma (Γ): Measures the rate at which Delta is changing.

•   Theta (θ): Measures the time decay of an option. Options become less valuable as the expiration date gets closer.

•   Vega (υ): Measures how much implied volatility affects an option’s value. The more volatility there is the higher an option premium becomes.

•   Rho (ρ): Measures an option’s sensitivity to changing interest rates.

The Takeaway

Delta is a useful metric for traders evaluating options and can help investors determine their options strategy. Traders often combine it with other tools and ratios during technical analysis. However, you don’t need to trade options in order to get started investing.

If you’re looking to begin options trading, a great way to start is with a user-friendly platform like SoFi’s. Thanks to its intuitive and approachable design, SoFi’s platform allows you to trade options through the mobile app or the web platform. Plus, you’ll have access to educational resources about options so you can learn more.

Pay low fees when you start options trading with SoFi.

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Photo credit: iStock/PeopleImages

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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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