Mick Taylor is portfolio manager of a well-diversified, large-cap U.S. equity fund. Recently, Taylor and his team have been overweight cash, luckily avoiding a large drawdown in the S&P 500. After a near 30% decline in the headline Index, Taylor is feeling more optimistic about U,5. equity prices. However, Taylor notices that implied volatility, derived from the 5&P 500 options chain, remains 3 at abnormally high levels. Hence, Taylor decides to express his bullish views via index options, rather than risking the fund's full cash amount by investing in individual stocks. Taylor also believes the elevated levels of volatility are likely to decline during the next few months. Details on the S&P 500 3-month option chain are shown below. The 5&P 500 Index is currently trading at 2785. The index multiplier is 100.

Strike	$Bid	SAsk	Implied Vol	Delta	Open Intertest
2575	308.4	312.7	.4127	.6955	8,183
2650	253.8	285.2	3931	.6411	10,264
2785	164.9	167.9	.3510	.5259	2,857
2900	101.6	103.9	.3164	.4073	47,984
3000	58.5	60.7	.2874	.2948	51,659
Puts
Strike	$Bid	SAsk	Implied Vol	Delta	Open Intertest
2575	104.9	106.9	.4048	-.3019	13,023
2650	125.2	127.3	.3840	-.3564	32,573
2785	170.2	172.8	.3439	-.4745
2900	221.0	224.6	.3087	-.5959	2,099 47,741
3000	277.6	281.6	.2785	-.712	48,256

18. To take advantage of his view that implied volatility is likely to fall during the next several months, Taylor is most likely to?

1. Sell the 2785 call and buy the 2785 put
2. Sell the 2785 call and sell the 2785 put
3. Buy the 2785 call and buy the 2785 put