Option Income Funds -
What Are They?

Option Income Funds

These funds are often closed-ended funds, which mean it has fixed and limited number of shares and with fixed capitalization.

Such funds work best in environment when the portfolio of underlying stock is somewhat flattish or slightly trending upward over time so that the call options can be sold and premium can be collected repeatedly.

If the chosen portfolio of stocks performed well, then the fund run the "risks" of loosing some of these stocks positions within the portfolio and have to find replacement stocks to maintain an overall portfolio. In the process, the fund is therefore sometimes forced to forgo the upside of the equities that it held.

This process can be challenging if the market is in a phase of bull run and the good stocks that are included in the company’s analysis are all at higher levels and may be deemed over-valued by the fund managers.

In conclusion, for an Option Income Fund to perform well, it is imperative that the fund select and include quality stocks in its portfolio and be ready to accept lower premium (i.e. exhibition of more stability) collected in writing the call options. If the fund manager also practices market timing, he should make good judgment call on the timing of when the call options should be written so as to keep the quality stocks within the portfolio for as long as it is necessary, or till it is a good time to let go of the stocks.

Option Income Fund - Short Definition from Glossary Page

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