Question

Here is an excerpt from an article titled “Dominguez Barry Looks at Covered Calls,” appearing in the July 20, 1992, issue of Derivatives Week, p. 7:
SBC Dominguez Barry Funds Management in Sydney, with A$5.5 billion under management, is considering writing covered calls on its Australian bond portfolio to take advantage of very high implied volatilities, according to Carl Hanich, portfolio manager. The implied price volatility on at-the-money calls is 9.8%, as high as Hanich can ever remember.In response to rising volatility, Hanich is thinking about selling calls with a strike of 8.5%, generating premium income. “I’d be happy to lose bonds at 8.5%, given our market’s at 8.87% now,” he said.
Explain the strategy that Mr. Hanich is considering.


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