Option Income Fund

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DEFINITION of 'Option Income Fund'

A type of mutual fund with the goal to generate current income for its investors from the premium it earns by selling option contracts. The profits investors earn on the options are taxed as ordinary income, not as dividends, so option income funds are best held in tax-advantaged accounts. This income generating strategy is much riskier than investing in dividend paying stocks, although the returns can be much higher.

INVESTOPEDIA EXPLAINS 'Option Income Fund'

In his 2005 report to the Securities and Exchange Commission (SEC) stating that Madoff's hedge fund was a fraud, Harry Markopolos compared the Gateway Option Income Fund (GATEX) and other option income funds to Madoff's fund. This comparison showed that Madoff's returns were not realistic. These were just two of the 29 red flags Markopolos reported to the SEC in his 19-page memo.

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RELATED FAQS
  1. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  2. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  3. What action is the SEC likely to take on 12b-1 fees?

    The Securities and Exchange Commission (SEC) may take action to impose greater regulation on how 12b-1 fees are used, or ... Read Full Answer >>
  4. What is considered a reasonable 12b-1 fee?

    A reasonable 12b-1 fee is generally considered to be 0.25% of the assets of the mutual fund. The maximum amount allowed for ... Read Full Answer >>
  5. What are some of the most common mutual funds that give exposure to the retail sector?

    There are a number of mutual funds that give exposure to the retail sector. Three of the most popular funds are the Fidelity ... Read Full Answer >>
  6. What is the 12b-1 fee meant to cover?

    A 12b-1 fee in a mutual fund is meant to cover the fees of companies and individuals through which investors of a fund buy ... Read Full Answer >>

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