On March 1 of year 0, Judy was granted an incentive stock option (ISO) to purchase 50 shares of her employer’s stock for $10 per share. The FMV of the stock on the date of the grant was $12 per share. On May 1 of year 1, Judy exercised her option when the stock was selling for $15 per share. On July 1 of year 2, Judy sold all of the shares for $20 per share. What amount and character of income does Judy recognize in year 2?

1- $0

2- $500, ordinary

3-$500, long-term capital gain

4- $600, ordinary