Does the Concept of “Sunk Cost Fallacy” Apply to Options Trading Decisions?

Yes, the sunk cost fallacy applies significantly. This fallacy describes the irrational tendency to continue an endeavor because of invested resources (time, money, effort), even if the future outcome is likely negative.

In options trading, a trader who has paid a premium for a call or put might be reluctant to sell it for a loss before expiration, feeling the initial premium is "sunk." They hold on, hoping for a turnaround, instead of cutting losses and redeploying capital.