diff --git a/hy/compiler.py b/hy/compiler.py
index a060ed7..0595316 100644
--- a/hy/compiler.py
+++ b/hy/compiler.py
@@ -189,7 +189,6 @@ class HyASTCompiler(object):
         return ret
 
     def _parse_lambda_list(self, exprs):
-        """ Return args, keywords, varargs, kwargs from exprs."""
         exprs.reverse()
         args = []
         keywords = []
@@ -206,9 +205,11 @@ class HyASTCompiler(object):
                                          "lambda-keyword.".format(repr(expr)))
                 if expr == "&rest" and lambda_keyword is None:
                     lambda_keyword = expr
-                elif expr == "&optional" and lambda_keyword == "&rest":
+                elif expr == "&optional":
                     lambda_keyword = expr
-                elif expr == "&aux" and lambda_keyword == "&optional":
+                elif expr == "&key":
+                    lambda_keyword = expr
+                elif expr == "&kwargs":
                     lambda_keyword = expr
                 else:
                     raise HyCompileError("{0} is in an invalid "
@@ -224,12 +225,18 @@ class HyASTCompiler(object):
                     raise HyCompileError("There can only be one "
                                          "&rest argument")
                 varargs = str(expr)
+            elif lambda_keyword == "&key":
+                if type(expr) != HyDict:
+                    raise TypeError("FOOBAR")
+                else:
+                    keywords = [ast.keyword(arg=ast_str(k),
+                                            value=self.compile(v))
+                                for k, v in expr.items()]
             elif lambda_keyword == "&optional":
-                # add key to keywords and kwargs, value to kwargs? Look up AST docs you dummy.
-                pass
-            elif lambda_keyword == "&aux":
-                # update kwargs with the rest of the passed in keys/vals
+                # not implemented yet.
                 pass
+            elif lambda_keyword == "&kwargs":
+                kwargs = str(expr)
 
         if not kwargs:
             kwargs = None
@@ -1106,9 +1113,9 @@ class HyASTCompiler(object):
                         col_offset=x.start_column)
                     for x in args],
                 vararg=stararg,
-                kwarg=None,
+                kwarg=kwargs,
                 kwonlyargs=[],
-                kw_defaults=[],
+                kw_defaults=keywords,
                 defaults=[]),
             body=body,
             decorator_list=[])
diff --git a/hy/models/lambdalist.py b/hy/models/lambdalist.py
index b5da9e7..1a38066 100644
--- a/hy/models/lambdalist.py
+++ b/hy/models/lambdalist.py
@@ -33,7 +33,7 @@ class HyLambdaListKeyword(HyString):
         pass
     """
 
-    _valid_types = ["&rest", "&optional", "&kwargs"]
+    _valid_types = ["&rest", "&optional", "&key", "&kwargs"]
 
     def __init__(self, string):
         self += string
diff --git a/tests/compilers/test_ast.py b/tests/compilers/test_ast.py
index 7fd3478..3720901 100644
--- a/tests/compilers/test_ast.py
+++ b/tests/compilers/test_ast.py
@@ -339,6 +339,10 @@ def test_lambda_list_keywords():
     hy_compile(tokenize("(fn (x &rest xs) (print xs))"))
     cant_compile("(fn (x &rest xs &rest ys) (print xs))")
 
+def test_lambda_list_keywords_optional():
+    """ Ensure we can compile functions with &optional."""
+    hy_compile(tokenize("(fn (x &optional (foo True)) foo)"))
+
 def test_ast_unicode_strings():
     """Ensure we handle unicode strings correctly"""