It does seem that Black-Scholes cannot apply here. I think the main issue is timing the strike: for a normal option, if it is ever in the money, it will get exercised. For a "portfolio insurance" argument, it seems like we don't really care if the portfolio is down 99.9% for only a single day in the 20 year timespan. But neglecting that possibility would be ruinous to someone underwriting a normal option.