This report examines the Black Scholes-Merton model, a widely used method for valuing European call options, and discusses its assumptions and limitations. It presents Warren Buffett's critique of the model, particularly concerning its application to options with long-term maturities. Buffett argues that the model can produce inaccurate valuations due to factors like inflation and the difficulty in accurately predicting future market conditions over extended periods. The report analyzes Buffett's arguments, including his mathematical examples, and concludes that his concerns about the model's valuation of long-term options are valid. The report also touches upon strategies Buffett employed to profit from options trading, such as selling short-indexed put options. Finally, the report provides a comprehensive overview of the Black Scholes model and its implications in finance.
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