The Black-Scholes-Merton Model  • 47
The fact that the theoretical basis of option pricing is provably wrong 
is very good news for intelligent investors. The essence of intelligent option 
investing involves comparing the mechanically determined and unreason-
able range of stock price predictions made by the BSM with an intelligent 
and rational valuation range made by a human investor. Because the BSM 
is using such ridiculous assumptions, it implies that intelligent, rational 
investors will have a big investing advantage. Indeed, I believe that they do.
Now that we have seen how the BSM forecasts future price ranges for 
stocks and why the predictions made by the BSM are usually wrong, let us 
now turn to an explanation of how the stock price predictions made by the 
BSM tie into the option prices we see on an option exchange such as the 
Chicago Board Option Exchange (CBOE).