What Is the Difference between Intrinsic Value and Time Value in Options and How Does It Affect Loss Aversion?

Intrinsic value is the immediate profit if the option were exercised (In-The-Money). Time value is the portion of the premium based on the chance of the option moving In-The-Money before expiration.

Loss aversion is amplified by the decay of time value (Theta). As time value erodes, the option's worth drops, making the unrealized loss larger and pushing the trader closer to the emotional capitulation point.