Fabrizio just bought 1,000 shares of Intesa Sanpaolo Bank at €2.51 (Euro). He wants to write a covered call on the stocks to increase his profits. He sells 10 calls on the stock at a market price of €0.5, a strike price of €3, and six months to expiration. The stock pays no dividend.
a. What will happen to Fabrizio’s profit if the price of the stock rises to €4 a share?
b. Does the covered call offer any protection against the drop in price of the stock? Explain.