Sunk Costs

Heather Cullen

Heather Cullen

In The Money

Heather Cullen ITM Blog sunk costs euphoria

Sunk Costs.

That traders tend to cut their winners and let their losers run has been demonstrated by many studies. When they are on a winning trade, they become fearful that it will go bad, and they will lose the profits they have made. Conversely, when they are in a losing trade, they tend to hang in there waiting for it to come back into profit so that they don’t lose money. There’s even a comforting saying about it: ‘you haven’t lost until you’ve sold’.

Disposition Effect

Of course that is nonsense, but many people derive comfort from it and hold onto losing trades, sometimes for years. ‘I’ll sell as soon as it gets back to my buying price’ they say, blithely ignoring the fact that it has been going south for years there is little likelihood of this ever happening. 

Heather Cullen ITM Blog sunk costs euphoria

It’s called the ‘Disposition Effect’, and is related to prospect theory which says that people value gains and losses differently, which leads to inconsistent and sometimes irrational decisions-making.

Sunk Cost Fallacy

There is a related axiom, the sunk cost fallacy. This is the irrational commitment to a decision that has been made, based not solely on the purchase price of an asset, but the cumulative investment that the trader has made.

The time, the money, the emotions – influence their decision to hang in there, pursuing a losing course of action because of what they have already invested. You see this when traders hold onto a position they would never choose to get into now, but they hold because they are already there.

Why am I pondering on these right now? Because I have had two perfectly good examples of them in my own life this last week;

Taking Profits

(Disposition effect).  You may be wondering if it is time to get out of the market; after all we have made some lovely gains – should we sell up? It has occurred to me to advise everyone to ‘realise their gains’ and be happy with the profits we have made. I’ve even had the urge to do it myself as my accounts are all up very nicely and I’m a  bit smug.

Am I going to? No, I will wait until we get an ITM signal, even though it means I won’t be getting out at the top of the market whenever that is. 

We can all be brilliant traders in hindsight

Proof? I have just rolled all my nearer dated my positions out and up. Not what you do if you are going to sell up!

Walking Away

(Sunk costs). Last week was frustrating and infuriating. The website was down (FastComet maintenance – during business hours!), at the same time MailChimp decided that after more than 3 years of sending my emails that I might not own after all. Then the server changes Mailchimp required didn’t work, but managed to knock out my email which was with another provider. Plus, my PC has had a problem with the hard drive that Dell can’t figure out.

Heather Cullen ITM Blog sunk costs euphoria

Anyway, I won’t go into details, it was a perfect storm, and I was on the point of walking away from everything – books, blog, the lot – and going to trade quietly somewhere beautiful, rural France or a Greek island, perhaps. Then the ‘sunk cost’ effect kicked in – and I am still here!

To the markets

Well, stock market-wise, a rather lovely week! New all time highs in the S&P 500, the Nasdaq and the Dow!   

No nasty days, just a slow steady rise. Nice.

SPY Chart

Well, we have broken the 500 price barrier, and actually closed above it. Only for one day, however that is an encouraging sign. The other is the series of small candles, showing that most traders are generally in agreement that the price is right. The only worrying thing is that the volumes were below average all last week.

Heather Cullen ITM Blog sunk costs euphoria

And in perspective: (I can’t yet draw in an uptrend on the weekly chart as only 2 points would be touching it.)

SPYG Chart

SPYG continues to climb, just like SPY. It has sailed through what I though might be a psychological barrier at 70, closing above it for 3 days now.

Heather Cullen ITM Blog sunk costs euphoria

Unlike SPY it still has not taken out its previous high but is closing in on it. In perspective:

QQQ Chart

QQQ continues to rise.

And in perspective:

Heather Cullen ITM Blog sunk costs euphoria

VIX Chart

The VIX stays in low-volatility territory.

Heather Cullen ITM Blog sunk costs euphoria


Heather Cullen Blog ITMeter

The week ahead

I have seen some more headlines using the word ‘euphoria’. Interesting. Are we in euphoria? I don’t think so, but I thought it would be fun to ask GPT 4. After the initial definition:

The euphoric phase is marked by a collective belief in the perpetual rise of the market, leading to risky behaviors and speculative investments.

 I got a slap-down answer:

I can’t provide real-time analysis or confirm the current state of the stock market, including whether it is in a euphoric phase.

OK, not helpful. So I asked it to list the characteristics of the euphoric state and it did rather well – see below:

Heather Cullen ITM Blog sunk costs euphoria

I don’t think that we are meeting most of these at the present time – but then infallibility definitely isn’t one of my attributes!


The futures, 8 hours before market open, are down marginally. I believe there is some inflation data coming out on Tuesday so things may be a bit quiet until then.

Heather Cullen ITM Blog sunk costs euphoria

Well, fingers crossed for a good week – if it is anything like the last 2 weeks I will be very pleased.


Comments, Questions & Answers

13 thoughts on “Sunk Costs”

  1. Hi there. Just trying to wrap my brain around all of this. So simple yet complicated. I mean I have to be able to grasp this right?

    1. Hi Jeremy – just checking that you are reading In The Money: Bull market Strategy? If not, then the Bear strategy would probably not make sense. Or is it one of the other books? The Bull market strategy was intended as the first book for the ITM strategy.
      I am sorry if I haven’t explained thing properly, please feel free to use these comments to get anything you need clarified.

  2. Good afternoon Heather, I would like to start by thanking you for your books. They opened my eyes in a way that I thought it was not possible. I just bought “In The Money: Bull Market Strategy” and reading it for the 3 time, I love it. I have a quick question. I have been looking at implementing the DITMS (so far testing with paperMoney) but can’t find SPYG Calls with strike at 60% of current value (today SPYG: $69.84). Am I doing something wrong in my search (for reference I use Thinkorswim platform)? Quick fact about me, I am a Broadcast IT engineer. I know you are really busy but any tip will be highly appreciated. Thank you! -Alex

    1. HI Alex
      just had a ook at the chains for today. If we look at the June options there are
      strike bid ask mid Effective today % above Strike %
      June 35 34 36.5 35.25 70.25 69.76 0.70% 50.17%
      June 40 28.9 31.6 30.25 70.25 69.76 0.70% 57.34%
      June 45 23.9 26.7 25.3 70.3 69.76 0.77% 64.51%
      June 50 19.4 21.7 20.55 70.55 69.76 1.13% 71.67%
      So either the 40 or 45 strike would be nearest, and both less than 1% time value.
      September problematic because the lowest strike is 40, the figures are:
      strike bid ask mid Effective today % above Strike %
      September 40 29 32.4 30.7 70.7 69.76 1.35% 57.34%
      September 45 24.2 27.6 25.9 70.9 69.76 1.63% 64.51%
      So the 40 strike is almost 60% and has 1.35% time value.
      The problem wit SPYG is, of course, that the options don’t go out very far, so you have to remember to roll at least 30 days before expiry.
      I’ve just published the 2024 update in paperback and hardback, aiming to get the eBook up by7 the weekend, and it will give the new figures. If you have an eBook then you should be able to get the update free, as I haven’t classified it as a new edition.
      Hope this helps

  3. Hi Heather
    I love this system, simple and easy to track, One quick question, what time frame are you using for your MA charts? Is it the month, or 6 month ,or year view that you are using to identify when to get in and out.

      1. Ok So Daily Chart, but what is the time frame of the daily is it one day or one week or month 6 months? Looking at at the daily for a 5day view we would have been out on the Feb 12th back in on Feb 14. Looking at the daily for a 6 month view we staed in the whole time?

        1. Hi – I’m not sure I understand. The time frame is daily, as in the candlestick charts I post in the blogs, not the green line charts which are weekly, and only used for a longer term perspective.
          Each candlestick represents one day’s trading, and the total time frame of the chart doesn’t matter. I usually use around 4 months for the blog because then it is easy to see the individual candlesticks. The SMAs are the 10 day and 200 day.
          I feel I am not answering your question as I am not sure what you mean. But getting out on the 12th and back in on the 14th? I’ve had a looka at the chart but don’t see what you mean.
          When you are setting up a chart use the setting ‘daily’ data and the 10-day and 200-day SMA.
          Hope this helps, if not please get back to me.

          1. You did my chart was set to the hour not daily frequency which was much more aggressive. I see now moving it to the daily view slows it down and it doesn’t matter how many days out we are looking.

  4. Great advise Heather on following “The System” and not thinking that somehow one can predict where the markets will go in the days to come. The fact is, no one can tell with certainty where the S&P 500 will be tomorrow, next week, or next month. The temptation is always there to take profits or not to take signals when your system tell you to either enter or exit a trade. As traders we have to be aware of these temptations and do our best to be robotic with regards to “The System”. That’s why back-testing is so important… gives you clues on what to expect over the long term; however, in the short term, anything can happen. These long term clues is the best information we have. In the end it’s a game of thinking in terms of probabilities and not certainties.

    1. Heather, almost finished your book Bull Market ITM Strategies thank you for putting this together. I am anxious to get started with the DITM Bull strategy, is the advice to stand pat for what may be a little while to wait for the next death cross and then golden cross or do you have another recommendation to initiate a position?

      1. Hi Fran, you could be waiting for a while for a death cross! (at least I hope so) so I would suggest that you get into the market. When is something that I can’t predict, but after last yesterday’s falls it may be a good time to get in.
        I always take the view that if I have decided to get into a position I get into it – too many times I have waited for a market drop that never happened!
        Hope this helps.

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